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Government Debt Risks

China Implements Proactive Fiscal Policy to Manage Local Government Debt Risks

Beijing, March 10, 2024, The Europe Today: In a strategic move to harmonize economic growth and financial risk management, China has adopted a proactive fiscal policy, significantly amplifying the issuance of local government special bonds. This decisive step is pivotal to the nation’s commitment to ensuring a stable economic trajectory while effectively managing potential financial risks.

The recently submitted government work report, budget report, and economic and social development plan report to the National People’s Congress (NPC) underscore the comprehensive strategies devised to prevent and resolve local debt risks. A crucial aspect of these strategies is the commitment to containing new local government special debt issuance, setting a cap at 3.9 trillion yuan (549 billion U.S. dollars), a 100 billion yuan increase from the previous year. This initiative aims to fortify local governments in critical areas and is detailed in the central and local budgets report.

Experts emphasize that judicious government borrowing is a global norm, serving as a means to address insufficient construction funds. Yang Zhiyong, a researcher with the Chinese Academy of Social Sciences, asserts, “A reasonable scale and effective expenditure of debt can facilitate economic development.”

As of the end of 2023, the total outstanding local government debt reached 40.74 trillion yuan, within the NPC-approved budget limit. This figure includes approximately 15.87 trillion yuan of general debt and 24.87 trillion yuan of special debt, showcasing a meticulous approach to debt management.

Central bank governor Pan Gongsheng, in a November interview with Xinhua, assured that China’s government debt level remains internationally competitive, with ample resources and measures to mitigate debt risks. The recently released NPC Financial and Economic Affairs Committee’s report from June 2023 highlighted significant debt risks in specific cities and counties, particularly focusing on the emergence of new implicit debt.

Huang Shizhong, a professor at the Xiamen National Accounting Institute and a national lawmaker, acknowledged the heightened debt repayment pressures in some regions due to factors like the pandemic and real estate market adjustments. In response, 2023 witnessed policy signals emphasizing measures to control implicit debt increase, implement comprehensive debt resolution plans, establish a long-term mechanism for handling local government debt risks, and strike a balance between risk management and stable development.

Finance Minister Lan Fo’an, in a recent press conference, announced that coordinated efforts have led to an overall alleviation of local debt risks. The repayment of local government legal debt principal and interest is effectively guaranteed, implicit debt scales are decreasing, and progress has been made in settling government arrears to enterprises while reducing the number of local financing platforms.

Acknowledging the ongoing challenges, experts, including Huang Shizhong, underscored the need for further reforms to balance powers and financial resources between central and local governments. These reforms aim to establish a robust fiscal foundation, crucial for controlling the scale of local debt and minimizing associated risks.