China Unveils $837 Billion Debt Swap to Tackle Local Government Risks

China is taking a major step to address the growing risk posed by local government debt, announcing a plan to swap 6 trillion yuan ($837.7 billion) in off-balance sheet or "hidden" debt for bonds over the next three years, reports Reuters.

The move comes as China's economy faces a number of challenges, including weak domestic demand, a property crisis, and mounting financing strain for indebted local governments. These concerns have been amplified by the re-election of Donald Trump in the US, who has threatened to impose tariffs exceeding 60% on all Chinese goods.

The debt swap is a crucial element of China's efforts to stabilize its economy and ensure growth reaches its target of around 5% this year. The plan was approved by the standing committee of the National People's Congress (NPC), China's top legislative body, during a meeting from Nov. 4 to 8.

The debt swaps aim to resolve local debt risks, according to Xu Hongcai, the vice chairman of the financial and economic affairs committee of the NPC, at a press conference in Beijing.

The ceiling for local governments to issue special bonds will be raised to 35.52 trillion yuan from 29.52 trillion.

China has been grappling with the consequences of a large debt burden accumulated during previous stimulus efforts following the global crisis of 2008 and 2009. This includes "hidden debt" mainly incurred by local government financing vehicles (LGFVs), which were used to fund infrastructure projects deemed critical for development.

The debt overhang has limited the ability of local governments to fund new projects aimed at boosting economic activity.

Finance Minister Lan Foan revealed at the same press conference that "hidden debt" of local governments stood at 14.3 trillion yuan at the end of 2023, which authorities plan to reduce to 2.3 trillion yuan by 2028. The International Monetary Fund (IMF) estimates that LGFV debts amounted to 60 trillion yuan, or 47.6% of GDP, at the end of 2023.

The debt swaps are expected to save local governments 600 billion yuan in interest over five years.

The debt pile of LGFVs, including loans, bonds, and shadow credits, is seen as a growing source of systemic risk in China's financial system, particularly in a fragile economy.

Central and local government debt totaled 147 trillion yuan at the end of 2023, or 117% of GDP, according to the IMF.