China Launches Historic 6 Trillion Yuan Debt Swap Program: Full Press Conference
Just today, as the 12th Session of the Standing Committee of the 14th National People's Congress concludes, China unveiled its largest debt replacement plan ever. Six trillion yuan will be arranged over three years, with 2 trillion yuan allocated annually from 2024 to 2026, to support local governments in replacing various types of implicit debt. Additionally, according to Xinhua, China will also allocate 800 billion yuan annually from newly issued local government special bonds for five consecutive years, specifically for debt resolution, allowing for a total of 4 trillion yuan in implicit debt replacement. A total of 10 trillion yuan.
Before the presidential election, I saw some people suggesting that Beijing had prepared two different plans, with the final amount to be determined by the election's outcome. However, this misunderstands how Chinese policy decisions are made.
As I explained during the recent Ministry of Finance press conference, according to China's Budget Law, all budget-related changes and bond issuances must be approved by the Standing Committee of the National People's Congress (NPC). On November 4, prior to the election, the NPC Standing Committee had already reviewed the State Council's proposal on increasing local government debt limits to swap existing hidden debts.
The “6 trillion” can also be found in the explanation of the proposal document: (关于提请审议增加地方政府债务限额置换存量隐性债务的议案的说明)“Explanation on the Proposal to Review the Increase in Local Government Debt Limits for the Replacement of Existing Hidden Debt.“ Which was presented to NPCSC on Nov.4 and was made public today (Nov.8) on the official WeChat account of China State Finance Journal(中国财政), a journal led by the Ministry of Finance. It said:
On September 25, the Politburo Standing Committee meeting discussed and approved in principle the State Council Party Group's "Report on Work Arrangements Regarding the Increase of Local Government Debt Limits to Replace Existing Hidden Debt"
9月25日，中央政治局常委会会议讨论并原则同意国务院党组《关于增加地方政府债务限额置换存量隐性债务有关工作安排的汇报》
If that “approved in principle“ is the final, It suggests that the number of 6 trillion could be dated way back to Sep.25. (thanks
for pointing this out)Indeed, the US election will have an impact on the Chinese economy. However, it does not mean Chinese decision-makers need to wait and see the result of the election before they make their decision. As far as I know, the principle of “maintaining initiative in our own hands” (以我为主) has long been a cornerstone of Chinese policymaking.
Below is the translation of the press conference transcript, Participants include:
Minister of Finance: Lan Fo'an
Vice Chairman of the Financial and Economic Affairs Committee of the National People's Congress and Director of the Budget Work Committee of the Standing Committee of the National People's Congress: Xu Hongcai
Source: http://www.npc.gov.cn/wszb/zzzb47/
Xu:
On July 30, General Secretary Xi Jinping chaired a meeting of the Political Bureau of the CPC Central Committee, emphasizing the need to improve and implement a comprehensive local debt resolution plan. On September 26, at another Politburo meeting he chaired, Xi Jinping stressed the importance of effectively implementing existing policies while strengthening new ones.
Following the Central Committee's decisions, the State Council proposed increasing local government debt limits to replace existing implicit debt, submitting this proposal to the Standing Committee of the National People's Congress (NPC) for review and approval. The proposal suggests increasing local government debt limits by 6 trillion yuan to replace existing implicit debt, while ensuring local governments maintain primary responsibility. To facilitate implementation and expedite policy effects, the new debt limit will be entirely allocated as special debt limits, approved once but implemented over three years. Under this arrangement, the local government special debt limit will increase from 29.52 trillion yuan to 35.52 trillion yuan by the end of 2024. The Ministry of Finance has drafted a 2024 local government special debt limit adjustment plan (draft).
The NPC Standing Committee has fulfilled its legal duties according to law. The Budget Work Committee of the NPC Standing Committee strengthened communication with the Ministry of Finance; the Financial and Economic Affairs Committee of the NPC conducted a preliminary review and submitted its review report. On October 25, the 32nd Chairman's Meeting of the 14th NPC Standing Committee included this proposal in the agenda of its 12th session. On November 4, the 12th session of the 14th NPC Standing Committee held a plenary meeting, hearing the explanation of the proposal by Finance Minister Lan Fo'an on behalf of the State Council, and the review report from the Financial and Economic Affairs Committee, followed by legal deliberation. Committee members believed that the State Council's proposal to increase local government debt limits to replace existing implicit debt is an important measure in implementing the Central Committee's decisions. They supported putting the proposal to a vote at this session, considering its significance for effectively preventing and resolving local government debt risks, ensuring stable local fiscal operations, and supporting high-quality development.
On November 8, the 12th session of the Standing Committee of the 14th National People's Congress passed the "Resolution on Approving the State Council's Proposal for Reviewing the Increase in Local Government Debt Limits to Replace Existing Hidden Debt." The Resolution indicates agreement with the Financial and Economic Committee's review report and approves the proposal to increase local government debt limits to replace existing hidden debt.
To further improve the prevention and resolution of local government debt risks, the review report made recommendations focusing on:
Precise implementation of debt replacement bond policies
Strengthening local government accountability
Firmly preventing new hidden debt
Accelerating the reform and transformation of financing platform companies
Establishing a government debt management mechanism aligned with high-quality development
With the Standing Committee's approval of the proposal, the Ministry of Finance under the State Council will promptly allocate regional quotas according to procedures. Local governments will properly handle bond replacement work according to law, and People's Congresses at all levels and their Standing Committees will carry out supervision duties in accordance with the law. Today is China's Journalists' Day. Happy Journalists' Day to all journalists!
Q&A:
Xinhua Agency:
Xu Hongcai just introduced the situation regarding the National People's Congress Standing Committee's review and approval of the policy to increase local government debt limits by 6 trillion yuan to replace existing hidden debt. Could Minister Lan provide a detailed explanation of the policy considerations? To what extent can this policy resolve the issue of local hidden debt?
Lan:
The arrangement of 6 trillion yuan in debt limits to replace local governments' existing hidden debt is a major strategic decision made by the Party Central Committee. This decision considers multiple factors, including the international and domestic development environment, ensuring stable economic and fiscal operations, and meeting local governments' actual debt resolution needs. It's the "main event" among this year's series of incremental policies. After approval by the Standing Committee of the National People's Congress, it is officially announced today. This 6 trillion yuan debt limit will be allocated over three years, with 2 trillion yuan each year from 2024 to 2026, supporting local governments in replacing various types of hidden debt.
Why did I compare this policy to "timely rain" at the press conference on October 12?
In recent years, through the coordinated efforts of various regions and departments, China's local government's hidden debt has been continuously decreasing. By the end of 2023, after project-by-project screening and level-by-level review and reporting, the national hidden debt balance was 14.3 trillion yuan. Since this year, due to changes in the external environment and insufficient domestic demand, new situations and problems have emerged in economic operations, with tax revenue falling short of expectations and land transfer income declining significantly, making it more difficult for local governments to resolve the hidden debt.
In response to these situations, starting from 2024, 800 billion yuan will be arranged annually for five consecutive years from new local government special bonds to supplement government fund resources specifically for debt resolution, which can replace hidden debt totaling 4 trillion yuan. Adding the 6 trillion yuan debt limit just approved by the Standing Committee of the National People's Congress directly increases local debt resolution resources by 10 trillion yuan. It's also clarified that 2 trillion yuan of hidden debt for shantytown renovation due in 2029 and beyond will still be repaid according to original contracts. With these three policies working together, by 2028, the total hidden debt that local governments need to resolve will dramatically decrease from 14.3 trillion to 2.3 trillion yuan, with the average annual resolution amount reduced from 2.86 trillion to 460 billion yuan, less than one-sixth of the original amount, greatly reducing the debt resolution pressure. We have estimated that local governments can definitely achieve this through their own efforts, and for some regions, it will be relatively easy.
Overall, we have launched a comprehensive, targeted package of debt resolution measures that are direct and powerful in their effect. Thank you.
Sing Tao Daily:
This debt swap policy is the strongest debt resolution support measure introduced in recent years, and it is undoubtedly a timely policy intervention. Could you please explain how significant the policy effects of this debt swap will be?
Lan:
Currently, some local regions face large hidden debt burdens with heavy interest payments, which not only poses default risks but also depletes available local financial resources. In this context, implementing such a large-scale debt swap measure signifies a fundamental transformation in our debt resolution approach:
Shifting from emergency response to proactive resolution
Moving from isolated risk elimination to comprehensive risk prevention
Transitioning from "dual-track" management of hidden and statutory debt to standardized, transparent management of all debt
Changing from focusing primarily on risk prevention to balancing both risk prevention and development promotion
From a policy impact perspective, this achieves two goals at once:
On the one hand, it addresses local governments' urgent needs by relieving immediate debt resolution pressure and reducing interest expenses. This swap arrangement, with 8.4 trillion yuan concentrated in the next three years, significantly reduces the scale of hidden debt that local governments need to resolve, allowing them to move forward with a lighter burden. Additionally, since statutory debt interest rates are much lower than hidden debt rates, the swap will substantially reduce local interest payments. We estimate savings of around 600 billion yuan over five years.
On the other hand, it helps local governments improve their capital flow and enhance development momentum. The swap policy implementation:
Frees up resources previously used for debt resolution to promote development and improve people's livelihood
Creates policy space previously constrained by debt pressure, enabling stronger support for investment, consumption, and technological innovation, promoting steady economic growth and structural adjustment
Redirects time and energy previously spent on debt resolution toward planning and promoting high-quality development
Furthermore, it will improve financial asset quality, enhance credit lending capacity, and benefit the real economy.
MNI：
What measures will the Ministry of Finance take next to prevent new hidden debt and fundamentally resolve the hidden debt issue?
Lan:
This is an excellent question. While resolving existing debt risks, we must firmly prevent new hidden debt to address local government debt risks. The Ministry of Finance will work with relevant departments to maintain a "zero tolerance" strict supervision stance, investigating, dealing with, and holding accountable each case of new hidden debt discovered. We will focus on three main aspects:
First, broader monitoring scope. The Ministry of Finance is working with relevant departments to improve information sharing and regulatory coordination mechanisms, monitoring all types of debt for which local governments bear repayment responsibility, conducting dynamic analysis, providing timely warnings, and preventing risks. Regarding the operating debt of financing platforms, financial management departments have already developed policy measures to support local debt resolution according to relevant requirements, and we will actively cooperate to ensure the implementation of existing financial support policies.
Second, stronger budget constraints. We will treat the prevention of new hidden debt as an "iron discipline," continuously strengthen budget management, and supervise local governments to develop government investment projects in compliance with laws and regulations. Projects and expenditures not included in budget arrangements are strictly prohibited from implementation, resolutely blocking illegal local government borrowing channels.
Third, stricter supervision and accountability. We will strengthen the collection of information about new hidden debt, promptly identify new methods and variants of illegal borrowing, and shift supervision from post-event "firefighting" to pre-emptive prevention. We will strictly implement an accountability system for illegal local government borrowing.
Meanwhile, we will continuously improve local government debt management and accelerate the establishment of a debt system with Chinese characteristics that align with high-quality development.
People’s Daily: In recent years, the Standing Committee of the National People's Congress has continuously strengthened its supervision of government debt management. This year, the Standing Committee also heard the State Council's report on government debt management. Could you please introduce the relevant situation?
Xu:
General Secretary Xi Jinping places high importance on People's Congress supervision, emphasizing that People's Congresses at all levels and their Standing Committees must fulfill their constitutional and legal supervisory responsibilities. This ensures the implementation of Central Committee decisions, proper exercise of power by state organs, and protection of people's legitimate rights.
Budget review, state-owned asset management, and government debt management supervision are key aspects of congressional oversight. Since the 18th Party Congress, the Central Committee has issued several important documents establishing clear requirements for these supervisory functions, including improving audit problem rectification reporting, establishing state-owned asset management reporting systems, expanding budget review focus to expenditure and policy, and strengthening local congress oversight of government debt.
The National People's Congress (NPC) and local congresses have implemented these directives by:
Improving debt management supervision through legal reforms like Budget Law amendments
Including government debt, especially local government debt, in budget reviews and audit supervision
Local People's Congresses have conducted debt supervision work based on local conditions, providing important suggestions for debt risk prevention
In August this year, the Central Committee made important decisions to establish a government debt management reporting system, requiring governments at all levels to report regularly to their respective People's Congress Standing Committees. The NPC Standing Committee has developed implementation guidelines accordingly.
To prepare for the first hearing of the State Council's debt management report, the NPC Standing Committee conducted extensive research and gathered input from various departments and localities. At the 11th session of the 14th NPC Standing Committee in September, the State Council provided a comprehensive report covering:
National debt
Local government general and special-purpose debt
Hidden debt and risk resolution
Financing platform company debt monitoring and reform
Committee members acknowledged progress in debt management while noting remaining challenges. They recognized that government debt has played important roles in:
Implementing proactive fiscal policy
Addressing public welfare shortcomings
Accelerating infrastructure construction
Promoting bond market development
Overall, government debt risks were deemed controllable, though some issues remain. Twenty-five provincial-level People's Congress Standing Committees have already heard debt management reports.
Moving forward, the NPC Standing Committee will:
Strengthen supervision of both statutory and hidden debt
Monitor the implementation of local government debt swap programs
Oversee financing platform company debt monitoring and reform
Enhance research and coordination with government departments and local congresses
Promote sound debt management and risk prevention to support sustainable economic and social development
CMG:
After implementing the policy to swap existing hidden debt, what is the current situation of China's government debt? What new considerations are there for fiscal policy going forward?
Lan:
I understand you're concerned about two issues: the assessment of China's government debt level and the direction and intensity of fiscal policy.
Regarding the first issue, let me explain briefly from two aspects. First, from an international comparison perspective, China's government debt ratio is significantly lower than major economies and emerging market countries. According to IMF statistics, by the end of 2023, G20 countries' average government debt ratio was 118.2%, with Japan at 249.7%, Italy at 134.6%, US at 118.7%, France at 109.9%, Canada at 107.5%, UK at 100%, Brazil at 84.7%, India at 83%, Germany at 62.7%, and G7 countries averaging 123.4%. In comparison, China's total government debt was 85 trillion yuan, including 30 trillion yuan in national debt, 40.7 trillion yuan in local government statutory debt, and 14.3 trillion yuan in hidden debt, with an overall government debt ratio of 67.5%.
Second, regarding debt usage, local government debt has created substantial effective assets. The debt primarily funded capital expenditures, supporting numerous transportation, water conservancy, and energy projects, many of which generate continuous returns and provide both strong support for high-quality economic development and important sources for debt repayment. Overall, China still has considerable room for debt financing.
Regarding the second issue, we're actively planning the next steps for fiscal policy with increased counter-cyclical adjustments. On the one hand, we're continuing to implement incremental policies. This year's substantial policies are showing economic effects, with many policy effects continuing into next year. Tax policies supporting real estate market development will be announced soon, hidden debt swap work will begin immediately, special treasury bonds to supplement state-owned commercial banks' core tier-1 capital are being expedited, and guidelines for special bonds supporting idle land recovery and affordable housing are being developed.
On the other hand, we're implementing stronger fiscal policies for next year's development goals. This includes actively utilizing available deficit space, expanding special bond issuance scale and scope, continuing to issue ultra-long-term special treasury bonds, increasing support for large-scale equipment updates and trade-in programs, and increasing central-to-local transfer payments while strengthening support for technology innovation and people's livelihood.
Economic Daily:
We notice that the Standing Committee of the National People's Congress has only approved an increase of 6 trillion yuan in local government debt limits, while current fiscal revenue and expenditure contradictions remain prominent. Minister Lan, what measures will the Ministry of Finance take to achieve fiscal balance this year?
Lan:
Since the beginning of this year, affected by various factors, both central and local fiscal revenues have fallen short of expectations. We are taking a series of measures to ensure the completion of annual budget targets.
From the central government's perspective, in October, central general public budget revenue was 1.07 trillion yuan, up 7.9% year-on-year, with the growth rate increasing by 5.5 percentage points compared to September's 2.4%. From January to October, central general public budget revenue was 8.2 trillion yuan, with the year-on-year decline narrowing compared to the January-September period, showing an upward trend. For the remaining two months, on the one hand, while organizing revenue collection according to laws and regulations, we are arranging for relevant central units to turn in some special gains to supplement central fiscal revenue. On the other hand, we are strengthening fiscal expenditure management to ensure priority spending, especially the full allocation of central-to-local transfer payments.
From the local perspective, we have allocated 400 billion yuan in local government debt limits to supplement the local government's comprehensive financial resources. We encourage qualified localities to revitalize existing government resources and assets and strengthen state-owned capital revenue management to ensure fiscal expenditure needs. If necessary, localities can also utilize existing funds, such as the budget stabilization adjustment fund.
In conclusion, we have sufficient policy tools and resources to ensure national fiscal balance this year while maintaining the intensity of priority expenditures. Thank you.