Summary of Key Points
The balance of special local government bonds has exceeded 40 trillion yuan for the first time, representing a 44-fold increase over 11 years, mainly driven by the need to stabilize economic growth and the replacement of hidden debts. These bonds have played a crucial role in stimulating investment, creating jobs, and resolving hidden debt issues. However, they also face challenges such as declining debt repayment capabilities and inflated project returns. In the future, reforms will be implemented to optimize the structure of these bonds, gradually reducing their proportion and shifting focus towards more efficient areas of investment.
I. Why Did the Balance of Special Bonds Exceed 40 Trillion in Just 11 Years? Two Main Drivers
The rapid growth of special bonds is not accidental; it is primarily due to two factors:
1. The Need to Stabilize Growth: The issuance of new special bonds began in 2015 with only 0.1 trillion yuan, but by 2026, this amount had risen to 4.4 trillion yuan (a 44-fold increase). Since special bonds are not included in the fiscal deficit (they do not count towards the “deficit limit”), local governments can use them for infrastructure projects without violating deficit control regulations, leading to a continuous increase in their issuance.
2. Replacement of Hidden Debts: In the past, local governments secretly incurred significant amounts of hidden debt (e.g., through city investment companies). Now, special bonds are used to replace these debts, which allows for longer repayment periods and lower interest rates. For the period 2024-2028 alone, plans call for using 10 trillion yuan in special bonds to repay hidden debts, directly contributing to the increase in the bond balance.
Experts point out that this situation is related to China’s development model, where local governments are responsible for implementing policies and expanding investment. After the introduction of the tax-sharing system, local expenditures have increased while revenues have decreased, necessitating the use of special bonds to fill the financial gap.
II. What Are the Actual Purposes of Special Bonds?
Special bonds are not just used for arbitrary spending; they serve as an important tool for the government to boost the economy:
- Stabilizing Investment: They are mainly invested in areas such as municipal infrastructure, industrial parks, and land reserves. For example, from 2019 to 2025, special bonds for industrial parks supported 28,000 projects, accounting for 28.2% of total investment, significantly contributing to the development of modern industrial systems.
- Creating Jobs: Professor Mao Jie from Shanghai University of Finance and Economics estimated that special bond projects created 7.31 million jobs between 2019 and 2024, with each million yuan in special bonds generating approximately 20 new job opportunities, indicating a high cost-effectiveness.
- Resolving Hidden Debts: Special bonds with low interest rates and long terms are used to replace high-interest, short-term hidden debts, helping local governments reduce their debt burden and avoid the risk of default.
III. Risks Are Controllable, but There Are Several Concerns
While experts believe overall risks are manageable, several issues need attention:
1. Declining Debt Repayment Capability: Special bonds rely on revenue from land sales (government funds), which have been declining due to a sluggish real estate market. In 2020, land sales covered 5.27 times the amount of debt that needed to be repaid; by 2025, this ratio had dropped to only 1.81 times, potentially making debt repayment more difficult if the real estate market continues to perform poorly.
2. Poor Project Quality: Some local governments exaggerate the potential returns of projects to obtain special bonds (e.g., claiming they can cover both principal and interest when in reality, they cannot). Additionally, some funds are misappropriated or remain idle, and some projects generate no revenue after completion.
3. Repeating the Cycle of Borrowing New Debt to Pay Old Debt: In the first five months of 2026, less than 15% of local government debts were repaid from existing funds; the remaining 85% was covered by new bond issuance, creating a long-term risk if this pattern continues.
IV. What Measures Are Being Taken at the Central Level?
To address these issues, both the central and local governments have introduced several measures:
- Negative List Management: Specific areas are identified where special bonds cannot be used (e.g., non-essential government buildings), while the scope of investment is expanded to include new infrastructure and elderly care projects.
- Pilot Programs for Self-Audit and Self-Issuance: Local governments are encouraged to review and issue bonds on their own, resulting in faster issuance processes and more focused project selection (reducing the number of general-purpose projects).
- Diverse Debt Repayment Methods: Other sources of revenue and fiscal subsidies can be used to cover debt gaps. For instance, if an ecological project generates no income, the funds from land sales can be used to repay the debt.
- Asset Registration: After project completion, assets must be registered to ensure that revenues are directed towards debt repayment.
V. How Will Special Bonds Change in the Future?
In the long term, the role of special bonds will evolve:
1. Reduction in Proportion: The proportion of special bonds is expected to decrease, with an increase in the share of national bonds and ordinary local government bonds (national bonds will account for 56% of new debt by 2025). This change is due to a diminishing number of projects that can generate sufficient returns, making large-scale issuance riskier.
2. Shift in Investment Focus: The focus will shift from building physical infrastructure (such as houses and roads) to investing in areas that enhance human capital, such as agriculture, technology, elderly care, and vocational education. Although these projects may not yield immediate returns, they are more valuable in the long run.
3. Optimization of the Mechanism: The process will change from allocating funds based on predetermined quotas to approving projects only after their feasibility is confirmed, ensuring that funds are used efficiently.
In summary, special bonds have been a powerful tool for stabilizing economic growth in the past. In the future, more emphasis will be placed on project quality rather than sheer quantity, with a gradual shift from expansion to improvement in the effectiveness of investment.