Recently, the Minister of Finance, Lan Fuan, stated at a press conference held by the State Council Information Office that in order to alleviate the debt repayment pressure on local governments, in addition to continuing to allocate a certain scale of bonds in the annual additional special debt limit to support the resolution of existing government investment project debts, it is proposed to increase the debt limit by a large scale in one go to replace the existing implicit debts of local governments. This measure aims to intensify support for local governments in resolving debt risks, with detailed policies to be announced to the public after going through the legal procedures.

He emphasized that this upcoming policy, which is the most supportive debt resolution measure introduced in recent years, is undoubtedly a timely policy rain that will greatly reduce the pressure of local debt resolution. It can free up more resources for economic development, boost the confidence of business entities, and consolidate the grassroots "three guarantees".

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Local government debt risk is a major concern in the current market, and the pressure of debt resolution also restricts the financial efforts of local governments to a certain extent. At a time when the economic downturn pressure is increasing, market confidence is in urgent need of a boost, and fiscal efforts are highly anticipated, the central finance has decisively introduced the largest support for debt resolution in recent years, which undoubtedly grasps the "bull's nose" of the current problem. The author has communicated with some experts and local financial personnel and found that everyone also highly recognizes this policy.

Many people are speculating about the scale of the debt limit for debt resolution. Analysts predict that it ranges from 2 trillion yuan to 10 trillion yuan.

Since this is the most significant measure in recent years, it is necessary to understand the situation of debt resolution quotas in recent years. According to public data, from 2019 to 2022, the Ministry of Finance granted local governments the issuance of special refinancing bonds to replace implicit debts, with a total debt resolution quota of approximately 1.2 trillion yuan. To alleviate local debt risks, in 2023, the State Council introduced a package of debt resolution plans, and the Ministry of Finance data showed that the support for local debt resolution quotas exceeded 2.2 trillion yuan in 2023, and 1.2 trillion yuan has been arranged for 2024 to support local governments in resolving existing implicit debts and digesting government arrears to enterprises.

From the above data, it is not difficult to see that the upcoming debt resolution must reach the largest strength, and it should at least exceed the 2.2 trillion yuan of 2023. The specific quota will be disclosed at the National People's Congress Standing Committee meeting in late October. Considering that it takes time to determine the quota and then issue it to provinces, cities, and counties, it is not realistic to complete the huge bond issuance task in the last two months of this year. Therefore, this debt resolution quota may not be limited to the fourth quarter issuance but is likely to be the debt resolution quota for the next few years.

Since it is a debt resolution quota arrangement for several years, it is necessary to refer to the debt resolution situation from 2015 to 2018. After the implementation of the new budget law in 2015, local government debt management became more standardized. Due to the existing government debt before, more than 14 trillion yuan of local government debt did not exist in the form of government bonds but in the form of bank loans, local government financing platforms, and other non-bond methods, with high interest rates and short cycles. Therefore, a total of 12.2 trillion yuan of local government replacement bonds were issued during the four years from 2015 to 2018 to replace these non-government bond forms of government debt, achieving a significant reduction in interest and extending the debt repayment cycle.

The author has communicated with some experts and learned that although local governments have made efforts in recent years to reduce more than half of the implicit debt, the risk is safe and controllable, the scale of existing implicit debt is still large, at least exceeding 10 trillion yuan. Therefore, if a three-year or four-year debt resolution quota is introduced this time, the quota expectation should indeed be moderately increased.

However, the finance minister also stated that in addition to the above one-time debt resolution quota, a certain scale of bonds will continue to be arranged in the annual additional special debt limit to support the resolution of existing government investment project debts. Judging from the local disclosure this year, the scale of new special bonds supporting debt resolution is close to 1 trillion yuan. This also makes the actual support for local debt resolution in the next few years not limited to the upcoming one-time debt resolution quota.

In addition to the fiscal end issuing government bonds to replace implicit debts and resolve debt risks, the financial end, such as banks and other financial institutions, also support local debt resolution through extensions and interest rate reductions. Therefore, resolving local debt risks should not only focus on the upcoming one-time debt resolution quota.Therefore, the market should not overly focus on the debt quota this time, but rather read from the recent actual actions and the latest statements of the finance minister that China has the full capability to control local debt risks, maintain the risk bottom line, and has space and tools to flexibly adjust and resolve potential debt risks at any time.

At present, the local debt burden is relatively heavy, but the central fiscal burden is relatively light, and the central fiscal leverage ratio is far lower than that of major countries. The finance minister also emphasized at the aforementioned press conference that the counter-cyclical fiscal adjustment is not limited to supporting local debt resolution and other four policies that will be introduced soon, but also includes other policy tools that are under study. For example, the central finance still has a larger debt space and a deficit increase space.

Currently, there are also suggestions from the outside world to issue government bonds or special government bonds to replace the implicit debt of local governments, but the finance minister did not explicitly increase the debt quota to support debt resolution at the press conference. Whether it is to increase the central fiscal debt quota or the local debt quota also gives the market some room for imagination. However, when I communicated with experts and local fiscal personnel, everyone generally believed that the central finance would not directly use government bonds or special government bonds to replace local implicit debt, because on the one hand, there is a great moral risk, and on the other hand, it is difficult to operate.

Although the possibility of the central finance directly taking over and paying off local debts is very small, in recent years, the central finance has increased local financial resources through other forms, controlled local borrowing, and essentially helped localities free up financial resources for debt resolution.

For example, in recent years, when the national fiscal deficit has expanded, it has basically been the expansion of the central fiscal deficit, while the local fiscal deficit has remained unchanged. The additional 1 trillion yuan of government bonds issued at the end of last year were also all handed over to localities for use, without increasing the burden on localities. The ultra-long-term special government bonds issued in the next few years will also be partially used by localities, such as 500 billion yuan out of this year's 1 trillion yuan for local use. In the past two years, the central government's transfer payments to localities have exceeded 10 trillion yuan, which also supports local "three guarantees" and promotes development.

Of course, the local debt replacement itself is just a risk relief measure of extending the term and reducing interest rates, and the debt is still there, just exchanging time for space, and the core is still to resolve the debt through development, rather than simply reducing the debt scale.

Local debt risk prevention and resolution is a long-term task. At present, there are still a few localities that violate regulations to borrow and add implicit debt. It is necessary to strengthen supervision and accountability, truly curb the growth of implicit debt, and establish a long-term mechanism for resolving implicit debt. At present, in addition to resolving short-term local debt liquidity risks through the joint efforts of fiscal and financial policies, it is more critical to moderately increase borrowing, play the counter-cyclical adjustment role of fiscal policy, focus on improving the efficiency of bond fund use, boost market confidence, promote economic growth, and solve debt problems through development.