China's plan for 'debt risk defusing' expected to enhance economic growth
China’s Finance Minister Lan Fo'an recently announced a plan to substantially raise debt limits in order to replace the hidden debts of local governments. This initiative marks the official beginning of a new phase of "debt risk defusing" measures.
TroibNews 
**Editor's note:** Liu Ming is an assistant research fellow from the department of economic forecasting at China's State Information Center. The article reflects the author's opinions and not necessarily the views of CN.
The 12th session of the Standing Committee of the 14th National People's Congress concluded on Friday in Beijing, during which a proposal from the State Council was approved to raise local government debt limits, aiming to replace existing hidden debts.
This decision formally confirms Finance Minister Lan Fo'an's earlier statement at a press conference on October 12, where he outlined a plan for a substantial increase in debt limits to address local governments' hidden debts.
The proposal signifies the commencement of a new phase of "debt risk defusing" measures in the country.
Local governments play a crucial role in driving China's economic development and reform.
The proposal includes an increase in the local government debt limit by 6 trillion yuan. This adjustment will elevate the special debt limit for local governments from 29.52 trillion yuan to 35.52 trillion yuan by the end of 2024.
The resulting changes will not only invigorate local development but also serve as a critical strategy for reaching upcoming targets focused on high-quality economic growth.
One advantage of this incremental fiscal approach towards "debt risk defusing" is its potential to effectively mitigate local government debt risks.
Local governments have accrued hidden debts during their growth phases, and many of these debts are now coming due.
A decline in real estate investments has sharply decreased local land transfer revenues, complicating the flow of local funds and increasing debt risks.
The "debt risk defusing" proposal aims to address this issue by raising the debt limit to facilitate bond issuance, optimizing the debt maturity structure, and enhancing the sustainability of local government debt. These measures are designed to avert widespread defaults that could unsettle financial markets and disrupt social stability, while also aiding in the transition of hidden debts into more transparent forms.
This initiative will enhance debt transparency, fortify supervision over the utilization of funds replacing debts, and help guard against the risks associated with concealed debts.
Additionally, this incremental fiscal plan intends to boost local financial capacities.
Amid falling interest rates, the proposal allows for the replacement of short-term debts with long-term obligations and the refinancing of high-interest debts with lower-rate ones. This framework can significantly alleviate the fiscal burden on local governments and reduce interest expenses.
Consequently, local governments may experience an increase in available fiscal funds, enabling greater allocation towards areas like infrastructure development, industrial modernization, and technological innovation within the real economy. This will, in turn, lay a solid foundation for economic growth.
"Confidence is more important than gold."
The fiscal proposal approved by the NPC marks the most significant debt relief initiative in recent years and sends a strong message to the market about the government's commitment to reinforcing counter-cyclical policy adjustments.
This development is likely to significantly enhance market participants' confidence in both governmental policy and capital markets.
The gradual rollout of various incremental fiscal policies aimed at fostering high-quality economic development since September 24, paired with the clear institutional framework provided by the "debt risk defusing" proposal, will further underpin the potential for sustained recovery and improvement in China's economy.
As risk appetite increases, investors are expected to become more inclined to invest in local projects, and businesses will have greater motivation to expand their operations.
Meanwhile, with the capital markets developing healthily and the wealth effect on the rise, residents are likely to gain increased confidence in their consumption habits.
Ramin Sohrabi for TROIB News
The 12th session of the Standing Committee of the 14th National People's Congress concluded on Friday in Beijing, during which a proposal from the State Council was approved to raise local government debt limits, aiming to replace existing hidden debts.
This decision formally confirms Finance Minister Lan Fo'an's earlier statement at a press conference on October 12, where he outlined a plan for a substantial increase in debt limits to address local governments' hidden debts.
The proposal signifies the commencement of a new phase of "debt risk defusing" measures in the country.
Local governments play a crucial role in driving China's economic development and reform.
The proposal includes an increase in the local government debt limit by 6 trillion yuan. This adjustment will elevate the special debt limit for local governments from 29.52 trillion yuan to 35.52 trillion yuan by the end of 2024.
The resulting changes will not only invigorate local development but also serve as a critical strategy for reaching upcoming targets focused on high-quality economic growth.
One advantage of this incremental fiscal approach towards "debt risk defusing" is its potential to effectively mitigate local government debt risks.
Local governments have accrued hidden debts during their growth phases, and many of these debts are now coming due.
A decline in real estate investments has sharply decreased local land transfer revenues, complicating the flow of local funds and increasing debt risks.
The "debt risk defusing" proposal aims to address this issue by raising the debt limit to facilitate bond issuance, optimizing the debt maturity structure, and enhancing the sustainability of local government debt. These measures are designed to avert widespread defaults that could unsettle financial markets and disrupt social stability, while also aiding in the transition of hidden debts into more transparent forms.
This initiative will enhance debt transparency, fortify supervision over the utilization of funds replacing debts, and help guard against the risks associated with concealed debts.
Additionally, this incremental fiscal plan intends to boost local financial capacities.
Amid falling interest rates, the proposal allows for the replacement of short-term debts with long-term obligations and the refinancing of high-interest debts with lower-rate ones. This framework can significantly alleviate the fiscal burden on local governments and reduce interest expenses.
Consequently, local governments may experience an increase in available fiscal funds, enabling greater allocation towards areas like infrastructure development, industrial modernization, and technological innovation within the real economy. This will, in turn, lay a solid foundation for economic growth.
"Confidence is more important than gold."
The fiscal proposal approved by the NPC marks the most significant debt relief initiative in recent years and sends a strong message to the market about the government's commitment to reinforcing counter-cyclical policy adjustments.
This development is likely to significantly enhance market participants' confidence in both governmental policy and capital markets.
The gradual rollout of various incremental fiscal policies aimed at fostering high-quality economic development since September 24, paired with the clear institutional framework provided by the "debt risk defusing" proposal, will further underpin the potential for sustained recovery and improvement in China's economy.
As risk appetite increases, investors are expected to become more inclined to invest in local projects, and businesses will have greater motivation to expand their operations.
Meanwhile, with the capital markets developing healthily and the wealth effect on the rise, residents are likely to gain increased confidence in their consumption habits.
Ramin Sohrabi for TROIB News
