The 12th session of the 14th NPC Standing Committee closed on the afternoon of November 8th at the Great Hall of the People in Beijing. The meeting passed the resolution of the NPC Standing Committee approving the proposal from the State Council to increase the local government debt limit to replace existing hidden debts, totaling 6 trillion yuan, to strengthen local government responsibilities.

For the convenience of operation and early policy effectiveness, the additional debt limit is all allocated as special debt limit, to be approved at once and implemented over three years. From 2024 to 2026, 2 trillion yuan will be allocated each year to support local governments in replacing various hidden debts.

Experts believe that the large-scale replacement measures reflect the determination of the central government to resolve local government debt risks and promote economic growth, aiding in stabilizing and strengthening market confidence. This replacement measure will effectively boost consumer and investment demand, as well as assist city investment companies in transformation and development. In the future, the important role of fiscal policy in promoting sustained economic recovery will be more prominent, with room for incremental fiscal policy, leading to positive expectations.

Significant debt replacement boosts market confidence.

Since the beginning of this year, due to changes in the external environment and insufficient domestic demand, new situations and issues have emerged in economic operations, with tax revenues falling below expectations, significant declines in land transfer income, and increased difficulty in resolving hidden debts in various regions.

In response to the above situations, a timely combination of debt restructuring measures was introduced. Starting from 2024, 800 billion yuan will be allocated annually from new local government special bonds for five consecutive years to supplement the financial strength of government funds, specifically for debt restructuring, with a cumulative potential to replace 4 trillion yuan in hidden debts. Together with the 6 trillion yuan debt limit approved by the NPC Standing Committee, direct resources for local debt restructuring will increase by 10 trillion yuan. 2 trillion yuan in hidden debts from shantytown renovation due after 2029 will still be repaid according to the original contract.

"This proposal is very necessary and timely," said Pan Hongsheng, Chief Economist of the CSI 800 Financial and Real Estate Index Institute to reporters. Recently, due to changes in the internal and external economic environment, there has been a significant increase in pressure on local fiscal revenues and expenditures, with particular attention from society on local debts, especially hidden debts. This replacement measure provides clear policy expectations for relevant market entities, aiding in stabilizing and enhancing market confidence.

According to Finance Minister Lan Foan, with the three policy initiatives working together, by 2028, the total amount of hidden debts that local governments need to digest will be significantly reduced from 14.3 trillion yuan to 2.3 trillion yuan, with the average annual digestion amount decreasing from 2.86 trillion yuan to 460 billion yuan, less than one-sixth of the original, greatly easing debt restructuring pressure.

Citic Sec's chief economist and director of the research institute, Luo Zhiheng, pointed out that overall, the scale of this debt replacement is very large, reflecting the development of debt-for-equity swaps and the idea of ​​trading time for space, while also reflecting the determination of the central government to resolve local government debt risks and promote economic growth.

Large-scale replacement boosts demand and supports the transformation and development of urban investment.

From the perspective of policy effects, large-scale replacement measures can play a "two birds with one stone" role. On one hand, it solves the urgent needs of localities, easing current debt pressures, and reducing interest payments. Since the statutory debt interest rate is significantly lower than the implicit debt interest rate, the replacement will greatly save local interest payments. According to Lan Foan, it is estimated that about 600 billion yuan can be saved over five years. On the other hand, it helps localities smooth the funding chain, enhances development momentum, improves the quality of financial assets, strengthens credit issuance capacity, and is bullish for the real economy.

"Financial support for debt conversion can leverage fiscal multiplier effects through supplementing local finances, increasing household and business incomes, driving the enhancement of investment and consumption capabilities, and promoting positive economic recovery." Ming Ming, the chief economist of Citic Sec, stated that increasing the intensity of debt conversion helps clear local overdue corporate accounts, boosts corporate operational confidence and vitality, and enhances corporate income and profitability. Anticipated improvements in household and business income effectively boost consumption and investment demand, thereby forming a positive feedback loop.

Several experts also pointed out that debt replacement helps urban investment companies shed historical debt burdens, start anew, and provide a solid foundation for the transformation and development of urban investment companies.

Luo Zhiheng stated that for a long time, urban investment companies have played an irreplaceable role as important assistants to local government financing, promoting infrastructure construction, and advancing urbanization. However, with the debt accumulation caused by previous large-scale investments, some urban investment companies face heavy debt burdens and tight funding chains. Through debt replacement, urban investment companies can orderly shed implicit debts, achieve a clear division of debt responsibilities between the government and the platform, that is, "government to government, platform to platform," thereby reducing debt burdens and enhancing financial stability.

Incremental fiscal policy is worth looking forward to.

According to the arrangement of the proposal, by the end of 2024, the local government's special debt limit will increase from 29.52 trillion yuan to 35.52 trillion yuan. Lan Foan indicates that overall, China still has considerable room for government borrowing. Currently, the Ministry of Finance is actively planning the next step of fiscal policy, increasing counter-cyclical adjustment efforts.

According to lan foan, the relevant tax policies supporting the healthy development of the real estate market have been approved through the procedures and will be launched soon. The work of replacing implicit debts will start immediately. The issuance of special national bonds to supplement the core tier-one capital of large state-owned commercial banks is accelerating. Special bonds are being used to support the recycling of idle land, the addition of land reserves, and the acquisition of existing commercial properties for affordable housing. The Ministry of Finance is collaborating with relevant departments to develop detailed policy guidelines to facilitate faster implementation.

On the other hand, in line with next year's economic and social development goals, a more proactive fiscal policy will be implemented. The available deficit space will be actively utilized; the scale of special bond issuance will be expanded; ultra-long-term special national bonds will continue to be issued; greater support will be provided for large-scale equipment updates; and the scale of central-to-local transfer payments will be increased.

In Pan Hongsheng's view, the proactive fiscal policy in 2025 is expected to further strengthen efforts in expanding the issuance and allocation of special bonds, supporting major strategies and key areas with ultra-long-term national bonds, and providing increased support for large-scale equipment updates and consumption, among other key areas. The important role of fiscal policy in promoting sustained economic recovery and improvement will become more prominent, creating more favorable conditions and foundations for high-quality development.

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