At the press conference held on the 12th, Minister of Finance Liao Fu'an revealed the incremental policy to support local governments in resolving government debt risks.

"One-time increase in a large-scale debt limit to replace local government existing hidden debts" and "the most supportive measure in recent years to convert debts" are powerful statements that have attracted attention from all sides. How should we view this measure?

What is the increase in debt limit to replace existing hidden debts? Simply put, it is to replace the existing hidden debts of local governments by increasing the issuance of government bonds. This is conducive to making the hidden debts of local governments "explicit" and gradually "reducing" the risks.

"By issuing government bonds with lower interest rates and longer maturity to replace the implicit debts with high borrowing costs and short tenures, we exchange time for space. The process of debt replacement is also a process of risk reduction," said Luo Zhiheng, Chief Economist and Dean of the Research Institute at Yuekai Securities.

In order to effectively prevent and resolve local government debt risks, the Ministry of Finance has been consistently promoting the replacement of local debts in recent years.

Data shows that in 2023, the Ministry of Finance has arranged a debt issuance quota of over 2.2 trillion yuan for local governments, supporting the resolution of existing debts especially in high-risk areas and clearing overdue corporate accounts. Since 2024, the Ministry of Finance has arranged a debt limit of 1.2 trillion yuan to support local governments in resolving existing hidden debts and clearing government arrears owed to enterprises.

"By the end of 2023, the balance of hidden debts included in the government debt information platform nationwide has decreased by 50% compared to the baseline in 2018, and debt risks are under control," said Liao Fu'an.

However, this is by no means just a risk prevention policy.

At this press conference, the Ministry of Finance presented this debt-to-equity conversion measure as the first incremental policy, defining it as the "most significant in recent years," and provided a more detailed explanation during the Q&A session with journalists, highlighting the importance of this policy.

In fact, local governments play an important role in the development of the Chinese economy, not only can they directly create demand, drive investment, but also have close connections with various industries, affecting local economic development and the local business environment.

Local governments also have strong spending capabilities. Based on the 2023 national general public budget expenditure data, local expenditure accounts for about 86%, while central government expenditure accounts for about 14%.

Therefore, this is even more of a policy to "inject vitality" into local governments.

According to He Daixin, Director of the Fiscal Research Office of the Financial Strategy Research Institute of the Chinese Academy of Social Sciences, by replacing hidden debts, local governments will be able to "travel light," further strengthening their spending capacity, and having more resources to expand investments, boost consumption, and safeguard people's livelihoods.

This "chain" can be simply understood as the ability to drive local governments to generate and release additional expenditure by resolving debt burdens.

"This will drive local governments to play a more proactive role in economic development, improve the local business environment further, increase market confidence, and generate multiplier effects," said He Daixin.

As Lan Fo'an stated at the press conference, "This is undoubtedly a timely policy intervention that will greatly relieve the burden of local debt, freeing up more resources for economic development, boosting confidence among operational entities, and reinforcing the basics of 'three guarantees.'"

The size of this replacement has attracted a high level of attention from all sectors. Looking back at previous year's data, the replacement scale exceeded 2.2 trillion yuan last year. This indicates that the scale of the new measures will definitely be above 2.2 trillion yuan.

It is worth noting that the Ministry of Finance, which has always been relatively stable in its stance, has issued strong statements this time, such as "The largest effort in recent years" and "a one-time significant scale", which leave room for imagination. It can be expected that a powerful fiscal increment policy is about to come.

Editor/Somer