China has continued 1 of the largest local finance clearing programmes in fresh years. The aim is to reduce hidden debts of local governments, reduce the function of local investment financing platforms, i.e. LGFV, and transfer any of the liabilities to more transparent public balance sheets. The program improves the debt structure, but does not remove all problems. Operational debt of these entities and the ability of local governments to make sustainable income are increasingly important.
China is entering another phase of local debt clearing. This is primarily about commitments that over the years have grown outside the average self-government budgets, most frequently through local investment financing platforms, defined by the abbreviation LGFV from the English Local Government Financing Vehicles. In Chinese practice, these were entities utilized to finance roads, bridges, railways, industrial parks, urban infrastructure and improvement projects, which could not be formally financed by the direct debt of local authorities.
This model has long supported fast infrastructure development. In time, however, it has become a origin of considerable financial risk. any of the liabilities of the LGFV were treated by the marketplace as a debt for which local governments are yet responsible, even if it was not explicitly included in authoritative government debt statistics. It is this area that the Chinese authorities specify as a hidden debt of local governments.
A program of value in billions of yuan
In November 2024, the Chinese authorities approved a broad local debt swap program. According to the information of the Ministry of Finance and the relations of Chinese financial media, it primarily includes an increase in the debt limit of the local government by 6 trillion RMB, spread over 3 years, and the allocation for 5 consecutive years of RMB 800 billion per year from fresh peculiar local bonds to service and replace hidden liabilities. This totals 10 trillion RMB of direct resources related to local debt restructuring.
More broadly, the Chinese authorities besides referred to a package that would reduce the pressures associated with hidden debt by around 12 trillion RMBs, if part of the commitments were besides taken into account for later years and another shielding activities. At the rate of about 1 RMB = 0.55 PLN this means a scale of 6.6 trillion PLN. However, specified conversion is purely indicative due to the fact that the strategy is accounted for in yuan and primarily affects the structure of Chinese public debt.
The mechanics is comparatively simple. Local governments issue authoritative bonds, most frequently peculiar purpose, and the funds they receive are utilized to replace more expensive, little transparent or short-term liabilities. In practice, this means transferring part of the debt from the semi-formal area to the authoritative public sector balance sheets. Thus, not only the cost of servicing debt, but besides its visibility, changes.
According to S&P Global Ratings, the program can importantly reduce the hidden liabilities attributed to the LGFV, but in itself does not solve the problem of the full debt of these entities. The Agency points out that hidden debt is only part of the wider problem, as the LGFV besides has large corporate and operational debt that is not automatically covered by the conversion programme.
The debt becomes more visible
From the central authorities' point of view, 1 of the main objectives is to increase transparency. Previously, a crucial part of the liabilities was distributed between local governments, peculiar intent companies, banks, bond investors and another financial institutions. The debt swap programme is intended to guarantee that commitments considered to be the actual work of local authorities are transferred to the authoritative debt management system.
According to the figures cited by the Chinese Ministry of Finance, at the end of 2023 the balance of hidden government debt was about 14.3 trillion RMB. After the start of the restructuring program, this amount was to fall to 10,5 trillion RMB at the end of 2024, which is almost 4 trillion RMB per year. For Beijing, this is an argument that the program works according to assumptions.
At the same time, it should be stressed that the fall in hidden debt does not mean an automatic simplification in full public debt. any commitments do not disappear, but are converted into an authoritative local debt. Its structure is improving, transparency is expanding and the cost of backing is usually falling, but the overall burden on public finances remains high.
The program is not a classical debt write-off. Rather, it is an effort to organise commitments, reduce interest costs and spread payments over time. In this sense, the Chinese strategy is to reduce the hazard of a abrupt liquidity crisis and not to immediately extend local governments.
LGFV emerges as a backing tool for local authorities
The second component of the programme is the gradual simplification of the function of the LGFV as tools for financing local governments. According to the Chinese financial media coverage, the authorities presume that by the end of June 2027 platforms subject to central supervision are to be removed from the list of entities serving as local debt financing.
The trial is already underway. According to information provided by the People's Bank of China, by the end of 2024 about 40% of local backing platforms were to exit this category by marketplace transformation or another forms of restructuring. At the same time, their operational financial debt scale was about 14.8 trillion RMB, or about 25% lower than in early 2023.
In later accounts, Chinese media, citing the statements of the Ministry of Finance, reported that by mid-2025 more than 60% of the platforms were to have completed the process of leaving the LGFV category, which meant clearing the hidden debt assigned to them. These data show fast formal progress, but do not yet find the full improvement of the financial condition of the entities themselves.
It will be hard for many to decision to marketplace activities. Part of the LGFV manages infrastructure assets that are of public importance but do not make adequate cash flows. Others have assets that can be commercialised, but this requires time, valuation, organisational changes and uncovering investors.
The biggest challenge: operating debt
The main hazard concerns debt that is not classified as hidden government debt. The commitments entered into by the LGFV as economical operators. These may be bank loans, bonds, loans from non-bank institutions or another forms of financing.
This debt is more complex. Part of the liabilities are covered by assets generating revenue, for example in infrastructure charges, rents, municipal service revenues or revenues from industrial projects. However, any relate to assets that have social or strategical value but do not make adequate income. The most hard is simply a group of liabilities that do not have unchangeable cash flows or easy to sale assets.
S&P Global Ratings points out that LGFV's corporate debt is simply a bigger problem than the hidden debt itself covered by the swap program. According to this assessment, specified debt accounts for more than 70% of their full debt and will require separate restructuring, greater financial discipline and a real assessment of the LGFV’s ability to handle liabilities independently.
It is this area that will decide whether the improvement will continue. If the LGFV are formally removed from the list of backing platforms but are inactive kept alive by local authorities, banks and deferred refinancing, the hazard will not disappear. He'll only change his form.
Pressure on local budgets
The restructuring of local government debt takes place in a hard fiscal environment. In fresh years, local budgets have experienced a fall in land sales revenue, which has previously been 1 of the key sources of investment financing and debt servicing. The real property crisis has reduced the proceeds of this and reduced the financial flexibility of many provinces, cities and districts.
At the same time, authoritative local debt is growing. This is partially the natural effect of the debt swap scheme: a debt previously outside the main balance sheet is disclosed and transferred to authoritative limits. This is beneficial in terms of transparency. From the position of local budgets, however, it means a higher interest burden and the request for more stringent liquidity management.
The central authorities declare that fiscal policy will stay active and bond measures are intended to support both improvement and stabilisation of risks. The draft budget for 2026 indicated, among another things, the continued usage of peculiar local bonds, support for large investment projects and measures to pay back the backlog and reduce hidden debt.
For local governments, this means that respective objectives request to be reconciled simultaneously: maintaining investment, servicing debt, reducing fresh liabilities and improving the efficiency of public assets. This is not an easy task, especially in regions with weaker incomes and greater dependence on infrastructure funding.
Rehabilitation of assets as a complement to the scheme
In consequence to the constraints of the debt swap programme, part of the provinces make activities identified in China as activating or revitalizing resources, assets and state funds. The concept of 三资三化 ("Three types of capital and 3 transformation processes") appears in local materials, which can be described as an effort to transform public resources into assets, assets into collateral or sources of revenue, and public funds into more efficient financing tools.
In practice, it is simply a substance of identifying assets that have been utilized poorly so far and then renting them, selling them, commercialising them, transferring them to companies or utilizing them as collateral for financing. Examples of specified activities have emerged, inter alia, in the provinces of Hubei and Hunan, where local authorities declared an overview of large public resources and an effort to mobilise any of their economical value.
This approach may aid to improve liquidity, but it carries risks. Not all public assets can be rapidly valued or sold without losses. any have unclear ownership status. any of them have public functions that cannot be easy subject to commercial accounting. There is besides a hazard that the monetisation of future cash flows will only shift the debt problem to later years.
Reform increases transparency but does not end the problem
The Chinese local debt restructuring programme has tangible effects. It reduces the scale of hidden liabilities, reduces the cost of part of funding, prolongs maturity and increases control of central authorities over local finance. From the point of view of the stableness of the financial system, this is crucial as it reduces the hazard of abrupt insolvency and uncontrolled refinancing.
However, this does not mean that the issue of local debt has been resolved. The most hard issues inactive concern the ability of the LGFV to operate on marketplace terms, the quality of their assets and the income of local governments after the weakening of the real property market. The transfer of liabilities to authoritative balance sheets alone improves transparency but does not automatically make fresh repayment sources.
Three questions will be crucial in the coming years.
- Firstly, whether local authorities will actually refrain from creating fresh hidden commitments.
- Secondly, whether the LGFV will be able to decision from the function of administrative financing tools to the function of average economical operators.
- Thirdly, whether local governments will find unchangeable income that will let to handle a larger authoritative debt without limiting basic public spending.
If these conditions are met, the debt swap programme can become an crucial phase in the cleaning of Chinese local finances. If not, the current operation will be primarily a time shift. For now, the most reasoned assessment is cautious: China importantly improves the visibility and structure of local debt, but only the improvement of local government income and the actual transformation of the LGFV will show whether the problem has been reduced permanently.
In a broader context, this subject is linked to the tensions already under discussion on China24.com in local finance, including the emergence in government debt and the change in the model of financing public investment in China. It is so worth considering the current programme not as a one-off accounting action, but as part of a longer redevelopment of the relation between the central government, provinces, cities and the financial sector.
Sources
- S&P Global marketplace Intelligence, China’s 12 trillion yuan debt swap to release local debit pressure, bank margins
- 财联社, 财政部披露化债半程成绩单:1年隐性债务减少近4万亿 , 超6成融资平台退出
- S&P Global Ratings, LGFV Brief: China’s RMB10 Trillion Debt-Swap strategy is simply a Good Start
- Xinhua, 中国人民银行行长:金融支持融资平台化债取得重要阶段性成果
- Ministry of Finance of the PRC, information on implementation of budget and fiscal policy for 2026
Leszek B. Glass
Email: [email protected]
