Summary of Key Points
Over the past decade, the management of local government debt in our country has evolved from a state of "unregulated borrowing" to a more "legal and standardized" approach. This process began with the establishment of institutional frameworks for government bond issuance and debt limit management. Subsequently, efforts were made to mitigate risks by replacing high-cost debt and piloting programs to resolve hidden debts, while also promoting the transformation of financing platforms. However, challenges such as regional disparities in debt levels, blurred debt boundaries, and lagging platform transformations still exist. Moving forward, it will be necessary to develop a sustainable governance system that allows for debt reduction while fostering economic development.
Detailed Analysis
1. A Decade of Debt Reduction: The Critical Shift from Unrestrained Borrowing to Controlled Financing
In the past, local governments borrowed funds in a rather arbitrary manner, often through urban investment companies (CITCs) that issued debt with high interest rates and short terms, which could become significant liabilities if not repaid on time. The changes over the past decade have focused on three main areas:
- Establishment of Clear Rules: The new Budget Law in 2015 mandated that local governments could only borrow through official government bonds and were subject to a national debt limit (for example, the local debt balance was set at 54.82 trillion by the end of 2025, which did not exceed the limit). The debt-to-gross-domestic-product ratio of 68.5% is below international warning levels, indicating that the risks are manageable.
- Gradual Elimination of Hidden Debt: Hidden debts incurred by CITCs have been gradually replaced with low-interest, long-term government bonds (a total of 12.2 trillion yuan has been repaid). Pilot programs have been implemented in regions such as Shanghai and Guangdong to achieve the elimination of hidden debt, and high-risk provinces like Inner Mongolia and Jilin have been removed from the regulatory list.
- More Flexible Policy Tools: The use of special bonds (bonds designated for specific projects) has expanded; these funds can be used not only for infrastructure construction but also for purchasing existing commercial properties, repaying corporate debts, and even investing in industrial funds to help local governments address practical issues.
2. Current Challenges: Hindering Progress Due to Regional Differences and Unclear Debt Boundaries
Despite significant achievements, several obstacles remain:
- Profound Regional Disparities: Eastern provinces, such as Zhejiang, have a fiscal self-sufficiency rate of over 80% and can afford to repay their debts on their own, whereas many central and western regions have a self-sufficiency rate of less than 30% and rely entirely on central government transfers. Uniform debt management policies may either restrict the financial flexibility of eastern regions or fail to effectively control the risks in the west.
- Unclear Debt Boundaries: Some CITC debts are nominally corporate debts but are actually used to fund public welfare projects on behalf of the government. If these debts cannot be repaid, the government may have to step in, potentially transferring the financial risks to the public treasury.
- Misuse of Special Bonds: Some regions package unprofitable projects as "high-quality" initiatives to obtain funding. Once the funds are received, they may be misappropriated or not used effectively, leading to insufficient revenue to repay the debt and increasing financial pressure.
- Slow Transformation of Financing Platforms: Many CITCs have no other business activities beyond lending for the government and are burdened with heavy historical debt. They struggle to transform into genuine enterprises because they lack assets and industries.
3. The Difficulty of Transforming Financing Platforms
CITCs have long served as the primary mechanism for local government borrowing and now need to transition to market-oriented enterprises. However, this process is challenging:
- Time Pressure and Heavy Tasks: The goal is to complete the transformation of CITCs by June 2027. As of the first half of 2026, only 5,187 CITCs have been transformed nationwide. Eastern regions (such as Zhejiang and Jiangsu) have made faster progress due to their access to high-quality assets and industries, while central and western regions face difficulties due to a lack of resources and clear directions for transformation.
- Heavy Debt Burden: CITCs hold approximately 70 trillion yuan in interest-bearing debt, which is more than the amount of hidden debt. Some of this debt is corporate debt, and the government cannot afford to guarantee its repayment; thus, the CITCs must find ways to repay it on their own, but many lack stable income sources.
4. Towards Sustainable Debt Management: How to Solve the Problem Once and For All?
The key is to shift from emergency debt management to a long-term approach focused on generating revenue through development to repay debts. Several strategies include:
- Leveraging Idle Assets: Selling government-owned land, scenic areas, and franchise rights (such as highway tolls) to raise funds for debt repayment, or leasing idle assets.
- Precise Budgeting: Government investments should be directed towards new industries, public welfare, and major infrastructure projects, avoiding unnecessary expenditures (such as reducing public-funded dining and entertainment).
- Effective Management of Special Bonds: Bonds should only be issued for projects with proven profitability, and the use and returns of the funds must be closely monitored. Regions with poor performance should be deprived of future funding allocations.
- Improving Central-Government Relations: Giving local governments more fiscal autonomy (e.g., allowing them to keep a larger share of taxes) to reduce their incentive to borrow indirectly. At the same time, the boundaries between government and corporate debt should be clearly defined, with the government refusing to guarantee corporate debts.
- Differentiated Approaches: Eastern regions can borrow moderately for development, while high-risk central and western regions should have strict controls on new debt. The central government should provide additional transfers to support these regions. For areas that cannot repay their debts, new borrowing should be restricted to force the resolution of existing risks.
In summary, debt management is not a one-time solution but requires a gradual approach that allows local governments to repay debts while promoting economic growth. It is also essential to establish systems to prevent the recurrence of debt problems, ensuring the long-term stability of the financial system.