What measures will be taken?, The central government has clearly formulated a comprehensive plan to mitigate the risks of local bonds. Risks | Debt | Local Bonds

There will be new policies to mitigate the risks of local government debt.

On July 24th, the Political Bureau of the Central Committee of the Communist Party of China held a meeting. Among them, in response to the many new challenges and risks in current key areas, the Politburo meeting proposed to effectively prevent and resolve local debt risks, and develop and implement a comprehensive debt reduction plan.

Feng Qiaobin, Deputy Secretary General of the China Finance Society, told First Financial that the issue of local government debt has become a major issue affecting and constraining the circulation of the national economy. The Politburo meeting has determined from a policy tone to develop a comprehensive debt reduction plan, and the next step will be to discuss specific implementation methods around this issue.

Yue Kai Securities Chief Economist Luo Zhiheng told First Financial that this Politburo meeting attaches great importance to local debt risks, and the overall approach continues the tone of the Central Economic Work Conference and the April 28 Politburo meeting. However, this time, not only from the perspective of curbing growth and reducing stock, but also emphasizes a package of debt solutions. This is a systematic and comprehensive solution proposed based on the complexity of the problem and the interweaving characteristics of debt and financial risks, reflecting the central government's consistent emphasis on systematic thinking and overall planning concepts.

At the end of last year, the Central Economic Work Conference proposed to prevent and resolve the risks of local government debt, resolutely curb the increase and resolve the stock. On April 28th of this year, the Political Bureau of the Communist Party of China Central Committee proposed to strengthen the management of local government debt and strictly control the addition of implicit debt.

The overall risk of local government debt in China is safe and controllable. According to data from the Ministry of Finance, as of the end of May 2023, the balance of local government debt in China was approximately 37.56 trillion yuan, controlled within the limit approved by the National People's Congress. In terms of local government implicit debt, the Ministry of Finance publicly stated last year that the growth momentum of implicit debt has been initially curbed, and more than one-third of the existing implicit debt has also been resolved. The risk of implicit debt has been steadily mitigated, and the overall situation is controllable.

However, in recent years, due to the response to the economic downturn, the scale of local borrowing has significantly increased, and the growth of fiscal revenue has been weak, leading to increased debt repayment pressure in some areas. In recent years, new implicit debts and chemical debts have not occurred in real time, and some local state-owned enterprises and institutions have become "platform oriented". Some cities and counties have weak debt repayment capabilities and high debt risks, resulting in greater pressure to repay principal and interest. Especially since the beginning of this year, some places have publicly stated that resolving debt difficulties cannot be effectively resolved solely by relying on their own capabilities.

These situations have raised market concerns, and recent discussions on preventing and resolving local bond risks have significantly intensified.

Luo Zhiheng believes that the reasons for the formation of local debt are complex, including systemic reasons, and after years of accumulation, the resolution cannot be achieved overnight. Especially with the interweaving of local debt risks, financial risks, and social risks, attention needs to be paid to the intensity and pace of disposal.

He stated that effective control of debt ratio requires handling several pairs of relationships: first, the relationship between stock and increment, ensuring the gradual resolution of stock debt and strict control of increment. The central government proposes a mechanism for party and government officials to be responsible to local governments, and provincial and lower level governments should also establish a mechanism for party and government leaders to be responsible to cities and counties to address moral hazard issues. 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. The third is the relationship between the numerator and denominator, which means that the debt at the numerator end should have a larger denominator output as much as possible, and the efficiency of using debt funds must be improved.

Luo Zhiheng stated that in the short term, it is necessary to deal with the issue of refinancing after debt maturity, avoid the risk of disposal, and focus on prolonging the cycle and reducing costs.

Previously, the Ministry of Finance provided guidance on six debt resolution methods for local governments, including directly using fiscal funds to repay debts; Repayment of operational state-owned asset rights and interests through transfer; Utilize project transfer funds and operating income; By means of debt swap or extension. Recently, the discussion on the way of debt replacement to convert debt has become increasingly heated. Some people even suggested that the central government issue treasury bond to replace local debt. Of course, this view is based on moral hazard and other considerations, which has also been opposed by many people.

Feng Qiaobin stated that the current issue of local government debt mainly focuses on urban investment bonds, which are a means of market-oriented financing for local governments. Therefore, resolving the risks of urban investment bonds is more complex than simply resolving government debt, involving more stakeholders.

"The current debt restructuring plan suggests that it should be based on the basic idea of reasonable risk sharing among different entities with different maturities, rather than the expectation of some market participants to replace it through central government borrowing. Localized debt is very complex and requires specific analysis of specific issues, and disposal should be based on different situations. However, relevant parties must bear the rights and obligations that match the debt in this process." Feng Qiaobin said.

Luo Zhiheng believes that in the short term, it is possible to optimize the debt structure and reduce the burden of local government debt through methods such as debt replacement, debt extension, debt restructuring, and borrowing to repay the old. In addition, the implicit debt in stock is becoming explicit and market-oriented, and some debts are converted into operational debts of enterprises in compliance. They are repaid using project transfer funds and operating income. However, the premise of doing so is to do a good job of risk isolation, reduce debts through bankruptcy reorganization, liquidation and other methods, and avoid risk transmission and regional systemic risks.

A local finance official told First Financial that he expects relevant departments to introduce a specific package of debt repayment plans. Debt swap may be a major measure to extend the term and reduce interest burden through swap.

Of course, to prevent the risk of local government debt, relying solely on short-term debt swaps and other relief measures is still a temporary solution rather than a fundamental solution.

Luo Zhiheng believes that it is necessary to promote the linkage reform of institutional mechanisms in the medium and long term to prevent and resolve local debt risks.

"At present, it is necessary to further clarify the relationship between the government and the market, define the responsibilities and scale of the government. Deepen the reform of administrative institutions, strengthen performance management. If the government takes on all responsibilities for a long time, a large government with a patriarchal system will inevitably have huge revenue and expenditure. Only by simplifying administration and delegating power, the market will belong to the market, and the government will belong to the government. A large number of public institutions will either return to non-profit institutions or go to the market to bear their own profits and losses. Implement mergers in districts and counties where population flows out, and reduce the number of financial support personnel." said Luo Zhiheng.

He suggested establishing 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. Deepen the reform of the social security system and avoid long-term excessive reliance on general public budget subsidies for social security. Stabilize macro tax burden as soon as possible.

Luo Zhiheng also suggested optimizing the debt regional structure and moderately relaxing the borrowing quota for urban agglomerations and areas with population inflows. Optimize the nature and structure of debt, and face risks realistically. We will increase the proportion of treasury bond and general debt, and reduce the proportion of local debt and special debt. Strengthen the coordination between finance and finance. Finance is the main focus, and the monetary and financial environment supports finance in terms of quantity and price.