hidden debt resolution framework emerges

context: The beating drums of debt relief have returned to the PRC for the first time since the last round ended in 2019. A hidden debt resolution scheme has been in motion since Q2 2023, while provinces and local governments throughout the country have been increasingly relying on refinancing bonds to deal with the most at-risk liabilities. Many fear the inability to resolve high debt levels will result in asset price deflation, hurting investment and arresting economic growth.

A number of local governments and provinces have introduced hidden debt relief frameworks, reports Jiemian

  • Dayao County in Yunnan announced the importance of staggering bond maturation to prevent overwhelming repayment pressure
  • Wuling District in Changde will include hidden debt repayments in the official budget
  • Wushan County in Gansu’s Tianshui called for including hidden debt in overall debt relief work

Some local governments have also begun asking for discounts on LGFV (local government financing vehicle) debts. That followed a 17 November 2023 meeting between financial regulators, banks, securities companies and other institutions that called for talks between lenders and LGFVs including relief measures like term extensions and refinancing.

The meeting sent a clear signal that this would be an important path to debt relief, explains He Daixin 何代欣 Chinese Academy of Social Sciences Institute of Financial Strategy Financial Research Office director. Advancing debt relief measures will improve market confidence, adds Sun Binbin 孙彬彬 Tianfeng Securities chief fixed income analyst.

But renegotiating debt simply transfers liabilities from local governments to local financial institutions, who may be too weak to accommodate them, notes an unnamed analyst. The centre must ensure these lenders have sufficient liquidity.

A trend has arisen regarding special refinancing bonds, where provinces with the weakest fiscal capacity (like Liaoning and Guizhou) are issuing the most bonds with the longest terms. Experts believe this will continue throughout next year. 

Answering 2018 State Council guiding opinions calling to resolve hidden debt in five to ten years, local governments and provinces are putting hard budgetary limits of debt repayments, limiting refinancing options

  • 8 percent in Changsha
  • 8 percent in Guizhou
  • 6.5 percent in Yunnan