Local debt acceleration, hidden debt balance rapidly reduced

Ask AI · How does implicit debt replacement help reduce local government financial burdens?

To prevent and resolve local debt risks, this year the replacement of implicit local government debt is accelerating.

According to enterprise early warning data, as of March 30 this year, local governments issued approximately 0.96 trillion yuan in refinancing special bonds used to replace implicit debt, accounting for nearly half of this year’s planned issuance scale (2 trillion yuan).

The government work report, when outlining this year’s tasks, called for actively and orderly resolving local government debt risks.

According to previous central debt relief plans, this year local governments will issue 2 trillion yuan in refinancing special bonds and 0.8 trillion yuan in new special bonds to replace existing implicit debt, achieve extension and interest reduction, and ease local debt risks. The data also reflects that debt relief is still a priority for implementation this year.

With the rapid implementation of local government bond replacements for existing implicit debt in recent years, the scale of implicit local government debt has been quickly reduced.

According to the Ministry of Finance, by the end of 2023, the balance of implicit local government debt nationwide was 14.3 trillion yuan, and by the end of 2024, it will decrease to 10.5 trillion yuan.

Lu Zhiheng, Chief Economist at Yuekai Securities, stated that the total issuance scale of various local government bonds used to replace existing implicit debt in 2025 will be about 3.1 trillion yuan, and it is expected that by the end of 2025, the implicit local government debt balance will drop to 7.4 trillion yuan. Considering the use of local own financial resources to repay implicit debt, the reduction could be even greater.

As the rapid implementation of the aforementioned implicit debt replacements continues this year, the balance of implicit debt will further decrease.

Data from the Ministry of Finance shows that after the full issuance of 2 trillion yuan in local government bonds to replace existing implicit debt in 2025, the average interest cost of local debt will decrease by more than 2.5 percentage points. The Ministry previously estimated that the five-year (2024–2028) debt relief plan could save about 600 billion yuan in interest expenses.

Some regions have already felt the reduction in interest expenses. For example, Guangxi’s budget report this year disclosed that by 2025, local issuance of special bonds to replace existing implicit debt will save over 1 billion yuan annually in interest.

After replacing implicit local government debt with government bonds, the debt repayment period has also significantly lengthened, easing the current repayment pressure on local governments.

Lu Zhiheng said that by 2025, the remaining average maturity of local government bonds nationwide will be 10.5 years, with the special bonds used to replace implicit debt having an average issuance period of up to 19.8 years. Longer issuance cycles for government bonds allow replacing shorter-term implicit debt, using time to buy space and mitigate risks.

Local government financing platform companies are the main entities of implicit debt. As implicit debt is rapidly reduced, many government financing platforms are transforming into ordinary state-owned enterprises, no longer bearing government financing functions, which also aims to curb new implicit debt and avoid “debt replacement while adding new debt.”

According to the “Report on the Implementation of the 2025 National Economic and Social Development Plan and the Draft 2026 Plan” disclosed by the National Development and Reform Commission, by the end of last year, over 82% of financing platforms had exited, and the stock of operational financial debt of financing platforms had decreased by over 74%.

Lu Zhiheng said that currently, local government financing platforms are accelerating exit, and through asset injection, debt restructuring, and revitalization of “three funds,” more urban investment platforms are shifting toward market-oriented operation and real entity operation, achieving “true exit.”

The government work report calls for increasing financial and fiscal support this year, optimizing debt restructuring and replacement methods, and taking multiple measures to resolve the operational debt risks of local government financing platforms, promoting reform and transformation in an orderly manner.

Lu Zhiheng stated that the debt of financing platforms mainly consists of two parts: implicit debt of local governments and operational debt. Operational debt of financing platforms, different from implicit debt, is corporate debt formed by market-oriented projects, mainly supported and resolved through financial institutions. Last year, local governments strengthened fiscal and financial coordination, built government-bank-enterprise matchmaking mechanisms, raised emergency revolving funds, promoted debt restructuring and replacement, and explored new risk isolation paths, effectively resolving operational debt risks, especially high-interest non-standard and crowd-involved debts.

Currently, the overall risk of local debt remains controllable. According to data from the Ministry of Finance, by the end of 2025, the local government debt balance will be about 54.82 trillion yuan, within the debt limit approved by the National People’s Congress.

Lu Zhiheng believes that last year, driven by the “debt relief plan,” the work of resolving local debt risks shifted from emergency response to normalized regulation. Significant progress has been made in six areas: implicit debt resolution, debt cost reduction, operational debt management, arrears clearance, transformation of financing platforms, and long-term mechanism construction, reducing local government burdens, restoring enterprise vitality to some extent, and smoothing economic circulation.

(This article is from First Financial)