ePaisa Payment Gateway: Significantly Reducing the Pressure on Local Governments to Defease Debt, Latest Response!

On 8 November, the twelfth meeting of the Standing Committee of the Fourteenth National People's Congress concluded successfully. The meeting adopted a resolution on increasing the local government debt limit to replace existing hidden debt, a proposal submitted by the State Council. Heads of the Ministry of Finance and related departments introduced the situation and answered questions from reporters.

The following is a summary of the key points:

- The proposal suggests that, in order to implement the decision-making and deployment of the CPC Central Committee, and on the basis of compaction of the main responsibility of local governments, it is recommended that the local government debt limit be raised by RMB 6 trillion yuan, which will be used to replace the existing hidden debt.

- From 2024 onwards, 800 billion yuan will be arranged annually for five consecutive years from the new local government special bonds to supplement the financial resources of the Government Fund, specifically for debt resolution, which can cumulatively replace 4 trillion yuan of hidden debt.

- For the 2 trillion yuan of hidden debt for shantytown renovation maturing in 2029 and beyond, repayment will still be made in accordance with the original contractual agreement.

- Continuing to maintain a "zero tolerance" high-pressure supervisory stance on new hidden debt, and promptly investigating, punishing and holding accountable the issue of new hidden debt.

- In recent years, through the intensive arrangement of 8.4 trillion yuan of replacement measures, the scale of hidden debt that local governments need to absorb has been significantly reduced, resulting in a lighter burden and smoother development.

- Increasing the scale of central-to-local transfer payments and strengthening the guarantee of investment in areas such as science and technology innovation and people's livelihoods.

Regarding the effectiveness of policies on the issue of hidden local government debt, the Ministry of Finance said:

- Starting from 2024, 800 billion yuan per year for five consecutive years will be arranged from the new local government special bonds for the replacement of hidden debt, totalling up to 4 trillion yuan.

- Combined with the 6 trillion yuan debt limit approved by the Standing Committee of the National People's Congress (NPC), this directly increases the resources available for local government debt resolution by 10 trillion yuan.

- Meanwhile, the 2 trillion yuan of hidden debt for shantytown renovation maturing in 2029 and beyond will still be repaid according to the original contract.

Together, these three policies have reduced the hidden debt burden that local governments need to digest from 14.3 trillion yuan to 2.3 trillion yuan by 2028, and the average annual digestion amount has dropped from 2.86 trillion yuan to 460 billion yuan, less than one-sixth of the original amount, which has greatly alleviated the pressure of debt resolution.

Regarding the effect of the replacement policy, the Ministry of Finance said:

At present, some localities have large hidden debts with heavy interest burdens, which not only pose a risk of "default", but also deplete available local financial resources. In this context, the implementation of large-scale replacement measures represents a fundamental shift in our approach to debt resolution:

- There has been a shift from an emergency response to a proactive approach to defuse the situation;

- Shift from piecemeal demining to overall risk reduction;

- Shift from "two-track" management of implicit and statutory debt to standardised and transparent management of debt;

- Shift from a focus on risk prevention to a focus on both risk prevention and the promotion of development.

In terms of policy effect, it can kill two birds with one stone:

- On the one hand, it meets the urgent needs of local governments, eases the current pressure to resolve debt and reduces interest payments. In recent years, through the intensive arrangement of 8.4 trillion yuan of replacement measures, the scale of hidden debt that local governments need to absorb has been significantly reduced, resulting in a lighter burden and smoother development. At the same time, as the interest rate on statutory debt is much lower than that on hidden debt, the replacement will result in significant savings in local interest payments, which are expected to be about RMB 600 billion over five years.

- On the other hand, it helps local governments to rationalise their financial chains and enhance their development momentum. Through the implementation of the replacement policy:

- Freeing up resources that would otherwise be used for debt resolution to promote development and improve people's livelihoods;

- Freeing up policy space that would otherwise be constrained by debt resolution pressures, increasing support for investment, consumption and scientific and technological innovation, and promoting stable economic growth and structural adjustment;

- Freeing up time and energy that would otherwise be spent on debt resolution to be invested more in planning and promoting quality development.

At the same time, it can improve the quality of financial assets and enhance the ability to invest in credit, which is beneficial to the real economy.

On how to prevent the creation of new hidden debt and to address the root causes of the hidden debt problem, the Ministry of Finance said:

In order to prevent and resolve local government debt risks, new hidden debt must be resolutely curbed while existing debt risks are addressed. The Ministry of Finance, in conjunction with relevant departments, will continue to maintain a high-pressure regulatory posture of "zero tolerance" for new hidden debt, and will promptly investigate, handle and hold accountable new hidden debt issues. The main efforts will focus on three areas:

- First, the scope of monitoring will be more comprehensive. The Ministry of Finance is working with relevant departments to improve information-sharing and regulatory coordination mechanisms, monitor local government repayment responsibilities, and conduct dynamic analyses, timely early warning and risk prevention. With regard to the operating debt of financing platforms, in accordance with the relevant requirements, financial regulators have formulated policies to support local government debt resolution, and we will actively collaborate to ensure the implementation of existing financial support policies.

- Secondly, budgetary constraints will be strengthened. We will adhere to the "iron discipline" of not creating new hidden debt, continuously strengthen budget management, urge local governments to implement government investment projects in accordance with the law, and resolutely eliminate extrabudgetary expenditures and investment projects.

- Thirdly, supervision and accountability will be stricter. We will strengthen the collection of new hidden debt clues, keep abreast of new methods and variants of illegal debt, and promote the extension of supervision from after-the-fact "fire-fighting and repair" to before-the-fact "prevention". We will strictly implement a system of accountability for illegal debt incurred by local governments.

At the same time, we will continue to improve local government debt management and accelerate the construction of a debt system that meets the requirements of high-quality development.

Regarding the implementation of the policy of replacing the existing hidden debt, the debt situation of China's government and the next step of fiscal policy considerations, the Ministry of Finance said:

Firstly, in terms of international comparison, our government debt ratio is much lower than that of major economies and emerging market countries. According to the statistics of the International Monetary Fund, the average government debt ratio of the G20 countries at the end of 2023 is 118.2%, of which: 249.7% for Japan, 134.6% for Italy, 118.7% for the United States, 109.9% for France, 107.5% for Canada, the UK is 100%, Brazil 84.7%, India 83%, Germany 62.7%; the average government debt ratio of the G7 countries is 123.4%.During the same period, China's government debt totalled 85 trillion yuan, including national debt of 30 trillion yuan, local government statutory debt of 40.7 trillion yuan, hidden debt of 14.3 trillion yuan, and government debt ratio of 67.5%. debt ratio was 67.5%.

Secondly, from the perspective of debt use, China's local government debt has created a large number of effective assets. China's local government debt is mainly used for capital expenditures, supporting the construction of a large number of transport, water conservancy, energy and other projects, many of which are able to generate sustained revenues, providing strong support for high-quality development and an important source of funds for debt repayment.

Overall, our government still has some room for debt issuance.

We are now actively planning the next steps in fiscal policy to enhance counter-cyclical adjustment.

On the one hand, we will continue to ensure the effective implementation of incremental policies. This year's incremental policies have been more vigorous, with the effects of economic stimulus gradually emerging, and many of the policy effects will continue to be released next year. We will step up our efforts to implement the policies that have been released and promote the expeditious introduction of policies that have not yet been released. Currently, tax policies to support the healthy development of the property market have been submitted for approval and are expected to be released soon. Hidden debt replacement will be launched soon. The issuance of special treasury bonds for supplementing the core tier 1 capital of large state-owned commercial banks is being actively promoted. The Ministry of Finance is working with relevant departments to study and formulate the details of policies on the use of special bonds to support the recycling of idle land, the creation of new land reserves and the purchase of existing commercial housing for use as guaranteed housing, and to promote their rapid implementation.

On the other hand, in line with the economic and social development objectives for next year, we will implement a more vigorous fiscal policy.

- Firstly, the space available for increasing the deficit is being actively utilised.

- Secondly, the issuance of special bonds should be expanded to broaden the scope of investment and increase the proportion of capital used for that purpose.

- Thirdly, we will continue to issue ultra-long-term special treasury bonds to support the building of security capacity in major national strategies and key areas.

- Fourthly, support for large-scale equipment upgrades should be increased and the scope of consumer goods upgrades should be broadened.

- Fifthly, the scale of transfer payments from the central Government to local authorities should be increased to strengthen the guarantee of investment in areas such as science, technology and innovation and people's livelihood.