The package of debt restructuring plans will be accelerated, and policy signals will be released intensively

On the 4th, China Securities Journal published an article titled "Policy Signal Intensive Release: A Package of Bond Reform Plans to be Accelerated". The article states that in recent times, policy signals for effectively preventing and resolving local debt risks have been intensively released. Experts say that since the beginning of this year, China's economy has continued to recover and overall recovery is improving, and the risk of local debt is generally controllable. At present, there are many effective measures to prevent and resolve local debt risks, including debt replacement, extension, and restructuring. The timing for the launch of a comprehensive debt plan is gradually maturing, and it is expected that relevant policy measures will be accelerated. The issuance of special refinancing bonds is expected to continue to advance.

Resolve inventory and strictly control incremental growth

In early July, the website of the People's Congress of China released the report of the State Council on the 2022 Central Final Accounts. Effectively preventing and resolving local government debt risks is one of the next key fiscal tasks proposed in the report.

The Central Political Bureau meeting held on July 24th proposed to effectively prevent and resolve local debt risks, and to develop and implement a comprehensive debt reduction plan. On August 1st, the People's Bank of China and the State Administration of Foreign Exchange held a work meeting for the second half of 2023, requiring the overall coordination of financial support for local debt risk resolution.

Experts believe that the intensive release of policy signals for effectively preventing and resolving local debt risks indicates the increasing importance of preventing and resolving local debt risks; On the other hand, it means that the resolution of local debt risks will accelerate, and it is expected that a package of debt restructuring plans will be introduced in the future. "By coordinating funds, assets, resources, and various policy measures to prudently resolve the implicit debt stock, it may become a key focus of efforts," said Gao Ruidong, Chief Macro Economist of Everbright Securities.

Luo Zhiheng, Chief Economist and Dean of the Research Institute of Yuekai Securities, believes that effective control of debt ratio requires handling several pairs of relationships: first, the relationship between stock and increment, ensuring that stock debt is gradually resolved and strictly controlling increment; The second is the relationship between explicit debt and implicit debt. Implicit debt should gradually become explicit and be divided into government debt and corporate debt based on the strength of public attributes, which should be resolved through fiscal and market-oriented legal methods, respectively; The third is the relationship between numerator and denominator, and it is necessary to improve the efficiency of using debt funds.

Reduce debt costs

According to data from the Ministry of Finance, in the first half of this year, local government bonds had a principal repayment of 1633.5 billion yuan upon maturity, of which 1484.9 billion yuan was repaid by issuing refinancing bonds and 148.6 billion yuan was repaid by arranging fiscal funds.

As one of the package measures, some experts believe that a new round of pilot projects for resolving hidden debt risks may be launched this year. For some eligible local government hidden debts, local governments are allowed to issue refinancing bonds for replacement, thereby extending the bond maturity, reducing interest rates, and mitigating risks.

"Special refinancing bonds can be issued within the limit to replace implicit debt." Zhang Jiqiang, Chief Fixed Income Analyst at Huatai Securities, said that this plan has less resistance and has already begun in some regions. It is expected to continue to be promoted in the future, mainly targeting the tail regions with high debt pressure. If necessary, the central bank may unify the allocation of quotas.

Liu Yu, Chief Analyst of Fixed Income at Guangfa Securities, believes that there may be a new round of implicit debt swaps in the second half of the year. "Whether it's hidden debt replacement or debt extension and interest rate reduction, the essence is to exchange low interest rates for high interest rates, exchange time for space, reduce debt costs, and alleviate short-term debt repayment pressure," Liu Yu said.

The trend is to promote the reduction of core costs from point to surface, extend existing debt, moderate debt replacement, and even individual debt restructuring. The Chief Economist of CITIC Securities clearly stated that there may be two mainstream solutions for debt resolution. One is to continue issuing special refinancing bonds. During the critical window period for resolving hidden bonds, there is a possibility of further expansion of the pilot program for resolving hidden bonds in established counties. Therefore, the issuance of special refinancing bonds is expected to resume. The second is to negotiate debt with local governments, state-owned enterprises, and financial institutions represented by banks, using external forces to alleviate the pressure of concentrated debt repayment and allocate valuable time for long-term stable development.

Promote institutional and mechanism reform

Experts believe that the current trend of economic recovery in China has not changed, and the overall risk of local debt is controllable. In the medium to long term, effective prevention and resolution of local debt risks require continuous promotion of financial and tax system and mechanism reforms.

Yuan Haixia, Executive Director of China Chengxin International Research Institute, believes that in the medium to long term, on the one hand, it is necessary to continue to promote the reform of the financial and tax system, accelerate the reform of the division of central and local powers and expenditure responsibilities, and strengthen the coordination role of central finance; On the other hand, establish a complete debt supervision framework, merge implicit debt with statutory debt for supervision, and improve the debt information disclosure system. Information disclosure should be carried out according to a certain frequency and comparable statistical caliber, reasonably guiding and stabilizing the expectations of all parties.

"In the medium to long term, we need to promote the linkage reform of institutional mechanisms." Luo Zhiheng stated that we need to clarify the relationship between the government and the market, define the responsibilities and scale of the government. Deepen the reform of administrative institutions and strengthen performance management. We need to establish a performance evaluation, incentive, and constraint system, as well as a financial evaluation system, that matches the multi-objective governance system. Establish a mechanism for assessing and holding accountable for the effectiveness of policy implementation before it is introduced, to prevent risks from spreading to the government in various fields, and to prevent risks from being overdrawn by the government.

It is more important to prevent the hidden debt risk of local governments from the source. Gao Ruidong believes that promoting the market-oriented transformation of investment and financing platform companies and divesting the financing functions of local government non operating projects is an important measure for the public sector to correctly handle the relationship between the government and the market, prevent hidden debt risks of local governments from the source, and promote the sustainable development of enterprises.