China has unveiled a series of robust fiscal measures aimed at tackling its growing local government debt, which has garnered significant international attention for its scale and impact. On October 12, at a press conference organized by the State Council Information Office, Finance Minister Lan Fo＇an announced a comprehensive policy package designed to alleviate debt pressures, particularly by addressing hidden debts accumulated by local governments. 

These measures, described as the "strongest debt relief initiative in recent years," mark a critical step in stabilizing China's economy amid domestic and global economic challenges. The plan focuses on raising the local government debt ceiling, issuing special government bonds to support the core capital of major state-owned banks, and leveraging various fiscal tools to stabilize the real estate market. Analysts view this debt relief package as an important move toward ensuring the sustainability of local government finances and promoting long-term economic growth.

Tackling Hidden Local Government Debt

The cornerstone of this fiscal policy package is the substantial increase in local government debt limits, aimed at resolving hidden debts that have accumulated over the years. By converting short-term, high-interest liabilities into longer-term, lower-interest government bonds, China is seeking to alleviate the financial burden on local governments and enhance the transparency of their fiscal operations. The replacement of these implicit debts with explicit, government-backed bonds is expected to significantly reduce local debt risks.

Minister Lan highlighted the importance of this debt restructuring as part of broader efforts to ensure financial stability. "This is one of the most substantial measures we've implemented to address local government debt," he noted. The government plans to increase local debt issuance by RMB 2.2 trillion (approximately USD 311 billion), supplemented by an additional RMB 1.2 trillion in 2023. These funds will primarily be used to replace hidden debts, which have long been a source of concern for financial regulators.

The significance of this measure lies in its ability to provide local governments with greater fiscal flexibility. By extending repayment periods and reducing borrowing costs, local governments can allocate more resources to economic development and public services, such as infrastructure investment and social welfare programs. This move is expected to improve the overall fiscal health of local governments, reduce the risk of default, and create a more favorable environment for business growth and investment.

Easing Debt Pressures and Boosting Business Confidence

One of the most immediate benefits of the new debt relief measures is the reduction in the debt burden faced by local governments, which will allow them to focus on stimulating economic growth and improving public services. Local governments in China are responsible for roughly 86% of the country's public expenditures, covering areas such as infrastructure development, education, healthcare, and social security. However, many of these governments have been constrained by high debt levels, limiting their ability to fund new projects and meet their obligations.

By replacing high-cost, short-term hidden debts with government bonds that have lower interest rates and longer repayment periods, local governments can free up resources for critical investments. This will not only help address immediate financial pressures but also provide a more sustainable path for long-term development. The reduced debt burden will enable local governments to clear outstanding debts to businesses, boosting cash flow for enterprises and improving their operational capacity.

Minister Lan emphasized the broader economic impact of the policy, stating that it will “bolster the confidence of market participants and strengthen the foundation for economic recovery.”As local governments regain financial flexibility, businesses—particularly small- and medium-sized enterprises (SMEs)—will benefit from improved payment terms, better access to financing, and enhanced opportunities for growth. This, in turn, will create a multiplier effect that drives further economic expansion and job creation.

Supporting the Real Estate Sector

In addition to addressing local government debt, the policy package includes specific measures aimed at stabilizing the real estate market, which has been a significant source of financial stress in recent years. The real estate sector is a key pillar of China's economy, influencing everything from household wealth to local government revenues. The downturn in the property market has created liquidity challenges for developers and local governments alike, leading to concerns about broader economic stability.

To mitigate these challenges, the government is allowing the use of special bonds for land reserves and land supply management. This will help regulate land prices, reduce the amount of idle land, and stabilize the real estate market. Additionally, the government plans to use special bonds to purchase existing housing stock, which will be converted into social housing. This measure will address the oversupply of unsold housing, provide affordable housing for low- and middle-income families, and contribute to the overall stabilization of the property market.

By targeting both the supply and demand sides of the real estate market, these measures aim to restore balance and prevent further declines in property prices. For local governments, the ability to manage land reserves and use special bonds for social housing projects will alleviate liquidity pressures and support fiscal sustainability. For the broader economy, stabilizing the real estate sector will enhance consumer confidence, encourage investment, and promote long-term economic growth.

Strengthening State-Owned Banks

A critical component of the fiscal measures is the government's plan to bolster the capital base of major state-owned commercial banks. These banks play a vital role in financing China＇s real economy and supporting economic growth, particularly through lending to key industries and SMEs. However, their ability to extend credit has been constrained by capital adequacy requirements, which limit the amount of risk they can take on.

To address this issue, the government will issue special government bonds to support the core Tier 1 capital of state-owned banks, enabling them to expand their lending capacity. This move is expected to enhance the banks'ability to absorb potential losses, improve their risk management capabilities, and provide more financing to businesses. In particular, the policy will allow banks to increase their support for SMEs, which have been disproportionately affected by the economic slowdown.

Minister Lan emphasized that this measure will “provide stronger support for the macroeconomic recovery and bolster market confidence.” By enhancing the financial strength of state-owned banks, the government is ensuring that businesses have access to the credit they need to invest, expand, and create jobs. This, in turn, will contribute to the broader goal of stabilizing the economy and promoting sustainable growth.

Ensuring Fiscal Sustainability and Long-Term Growth

While the primary focus of the new policy package is on addressing immediate debt risks and stabilizing the economy, the government is also mindful of the need to ensure long-term fiscal sustainability. Minister Lan underscored the importance of balancing short-term economic stimulus with long-term financial stability, noting that the government is committed to maintaining a prudent fiscal policy.

To this end, the Ministry of Finance has emphasized the need for coordinated fiscal and monetary policies, as well as greater collaboration between central and local governments. By aligning fiscal measures with broader macroeconomic goals, the government aims to create a more resilient and sustainable economic foundation. This includes strengthening the fiscal capacity of local governments, promoting investment in key sectors such as technology and education, and ensuring that social welfare programs are adequately funded.

In conclusion, Chinas latest debt relief measures represent a bold and strategic approach to addressing one of the most pressing challenges facing the country＇s economy. By alleviating local government debt pressures, stabilizing the real estate market, and strengthening state-owned banks, the government is laying the groundwork for long-term economic growth and stability. As these policies take effect, they are expected to boost business confidence, promote investment, and enhance the overall resilience of the Chinese economy.