China's Ministry of Finance Boosts Debt Limit to Alleviate Local Government Debt Issues

New Fiscal Measures to Tackle Local Government Debt in China

On October 12, 2024, Minister of Finance Lan Fuan held a significant press conference at the State Council Information Office, unveiling a series of new fiscal measures aimed at addressing local government debt risks and reinforcing China's economic stability. This initiative is crucial as local governments grapple with rising debt burdens while striving to maintain essential services and economic growth.

Key Announcements from the Ministry of Finance

During the press conference, several pivotal announcements were made:

• Planned Debt Limit Increase: The Ministry of Finance plans to implement a substantial increase in the debt limit, specifically designed to replace existing hidden local government debts. This strategic move aims to alleviate the financial strain on local governments while also freeing up essential financial resources for economic growth and stabilizing key social programs.
• Allocation of Local Government Bonds: A total of 2.2 trillion yuan in local government bonds has already been earmarked to assist in clearing overdue corporate accounts and addressing the current debts faced by local governments.
• Reduction in Implicit Debt: By the end of 2023, it is expected that the implicit debt included in the national debt platform will be 50% lower than its levels recorded in 2018, indicating a significant improvement in the management of local government finances.

Enhanced Debt Management and Treasury Fund Support

Minister Lan emphasized the need for improved scheduling of treasury funds to ensure adequate financial support reaches regions experiencing fiscal stress.

• The central government is set to expedite fund allocations to areas facing severe financial constraints.
• Provincial finance departments will be responsible for monitoring treasury funds, enhancing the financial capacity at the grassroots level, ensuring that funds are utilized efficiently.

Stability of the "Three Guarantees" Program

The "three guarantees" encompass people's livelihoods, wages, and grassroots operational expenses. While overall stability has been observed, certain regions are encountering challenges stemming from sluggish fiscal revenue growth and burdens from local government debt.

• In 2023, these guarantees accounted for roughly 80% of local financial resources.
• The Ministry of Finance plans to develop a long-term mechanism to ensure the sustainability of these guarantees.
• Additionally, a comprehensive list of expenditures for the three guarantees will be established to ensure appropriate fund allocation at the grassroots level.

Debt Relief Measures: A Five-Point Plan

The Ministry of Finance has laid out five key measures designed to further manage local government debt effectively:

1. Improved Oversight: Strengthening the monitoring of local government debt to ensure compliance with fiscal policies.
2. Transparent Reporting: Mandating local governments to provide regular updates on their debt levels and financial health.
3. Debt Restructuring: Facilitating the restructuring of outstanding debts to ease repayment burdens on local governments.
4. Enhanced Financial Training: Offering training programs for local finance officials to improve debt management practices.
5. Public Engagement: Encouraging community involvement in budget planning and financial decision-making to foster transparency.

These measures are poised to create a robust framework for managing local government debt, thereby contributing to a more stable and prosperous economic environment in China.

Conclusion

As China navigates challenging fiscal waters, the announcements made by Minister Lan Fuan reflect a proactive approach to managing local government debt. The focus on improving debt management and ensuring the stability of essential social programs not only addresses immediate financial pressures but also lays the groundwork for sustainable economic recovery and growth in the future.

For more detailed discussions on China's economic policies, visit our Economic Policies section. For external perspectives on fiscal stability, check out Brookings Institution.'s analysis.