China to Reduce Debt of Local Governments to Support Economy

beijing - China has announced one of its most ambitious plans in years to reduce the debts of local governments in order to stimulate the economy. The move comes as the country grapples with a significant debt burden accumulated from past stimulus measures during the global financial crisis.

China has unveiled plans to reduce the debts of local governments in an effort to boost the economy. The announcement came after the conclusion of the Chinese parliament's week-long meeting on Friday.

For years, China has been facing a massive debt pile left over from previous stimulus measures during the global financial crisis of 2008 and 2009. Much of this debt consists of hidden debts of local governments, which are loans that the government is responsible for but are not disclosed to the public or other creditors.

These hidden debts were largely accumulated by local governments in the past to finance key infrastructure projects. However, the debt burden poses a risk to China's financial and economic stability. The local governments, burdened by the huge debts, also have limited capacity to finance new projects and boost the sluggish economic activity.

To address the issue, China is allocating 10 trillion yuan (€1.3 trillion) to refinance the debts of local governments. The debt ceiling of local governments will be raised, allowing them to issue an additional 6 trillion yuan in special bonds to replace hidden debts. Additionally, they can use another 4 trillion yuan in approved bonds over the next five years to swap out their hidden debts.

Chinese Finance Minister Lan Fo’an estimates that the debt swap will save local governments approximately 600 billion yuan in interest payments over five years. This, he says, will free up more funds to drive investment and consumption measures. Lan also stated that the hidden debt of local governments stood at 14.3 trillion yuan by the end of 2023, with authorities aiming to reduce it to 2.3 trillion yuan by 2028.