In a recent press conference, China's Minister of Finance Lan Fuan elaborated on the government's latest strategic approach to address the country's long-standing challenge of hidden local government debt. Approved by the National People's Congress Standing Committee, the policy authorizes an increase of RMB 6 trillion in debt issuance limits, specifically earmarked for swapping local government hidden debt over a three-year period. Lan's in-depth discussion underscored the initiative's scale and anticipated fiscal impact, providing a clear trajectory for reducing local debt risks and supporting broader economic stability.

The RMB 6 trillion debt ceiling increase forms part of a robust debt restructuring package designed to address a critical issue: China's hidden local government debt, which stood at RMB 14.3 trillion by the end of 2023. The new policy envisions a phased approach, allocating RMB 2 trillion per year from 2024 to 2026 to swap high-interest hidden debts for lower-interest, more transparent debt. This restructuring, Lan emphasized, serves as a “timely intervention” to alleviate local governments' fiscal strains amid declining land sales revenue and underperforming tax income—a scenario compounded by external economic pressures.

Moreover, Lan detailed a complementary initiative that channels an additional RMB 800 billion annually from special local government bonds toward debt reduction. This measure, spanning five years from 2024, is projected to further reduce local government debt by RMB 4 trillion, collectively contributing to a net debt reduction goal of RMB 10 trillion by 2028. These measures aim to lessen the debt burden that local governments currently face, allowing them to redirect resources to developmental priorities and long-term fiscal stability.

The policy's benefits extend beyond immediate debt relief. Lan projected that the RMB 6 trillion swap, coupled with the reduced interest burden, will save local governments approximately RMB 600 billion over the next five years. By lightening the debt load, local authorities can reallocate funds toward economic development and social welfare, ensuring that resources previously reserved for debt servicing now contribute to stimulating investment and consumption.

However, as Lan noted, the policy's significance goes beyond its fiscal impact. The measure represents a paradigm shift in China's debt management approach, moving from reactive to proactive strategies. This shift includes a new commitment to transparency in public finance, aiming to consolidate both hidden and official debts into a unified management structure. Additionally, the reform brings a comprehensive risk management perspective, balancing debt reduction with growth support—both immediate and long-term.

While the policy is set to ease the pressure on local governments substantially, Lan addressed the importance of preventative measures to curb future debt accumulation. The Ministry of Finance will continue to uphold stringent oversight and zero-tolerance policies to prevent the recurrence of hidden debt. These include enhanced data sharing and collaborative monitoring mechanisms with financial regulators, enforcing budgetary discipline to close loopholes, and ensuring that local governments remain within legal borrowing limits.

The debt swap has cautious optimism from financial experts and market analysts, who view the policy as a pivotal step toward financial stability and sustainable growth.