Under the influence of various factors such as the impact of the three-year epidemic, the pressure on debt repayment has increased in some places, and the debt risk has increased, and 2023 has also become a key year for local governments to resolve debt risks.
From the meeting of the Political Bureau of the CPC Central Committee in July, which proposed to effectively prevent and resolve local debt risks and formulate and implement a package of debt reduction plans, to the subsequent financial and financial efforts to reduce debts, such as the issuance of special refinancing bonds of about 1.38 trillion yuan since the beginning of this year, from the central financial work conference at the end of October, which emphasized the establishment of a long-term mechanism for preventing and resolving local debt risks, to the introduction of a new mechanism for public-private partnership (PPP), and the implementation of the additional trillion yuan of treasury bonds issued by the central government in December, the actions of debt reduction during the year have been frequent.
A number of local debt experts told Yicai that this year's package of measures to resolve the risk of local bonds has made new breakthroughs, with unprecedented intensity, and the risk of local bonds has been significantly alleviated. One of the key to the future of debt will be to coordinate the risk resolution and stable development of local bonds. It is expected that some special refinancing bonds will be issued next year, and financial institutions will continue to help localize bonds. Fiscal policy will be moderately strengthened, and the central government will bear more deficits, creating a favorable environment for localized debt.
This year, the intensity of debt reduction is unprecedented, and the risk is mitigated
In recent years, economic growth has been under pressure, especially under the impact of the three-year epidemic, superimposed on large-scale tax cuts and fee reductions, as well as the impact of the downturn in the real estate market, local fiscal revenue has been significantly impacted. However, local rigid expenditures have not decreased, especially in recent years, when local debt repayment peaks, debt repayment expenditures have increased, and the contradiction between local fiscal revenue and expenditure has intensified.
At present, China's local government debt risk is generally safe and controllable, but the debt distribution is uneven, and in the context of the intensification of the contradiction between fiscal revenue and expenditure, some places are under great pressure to repay principal and interest, and they are facing difficulties in debt repayment.
For example, in April, a research report by the Development Research Center of the Guizhou Provincial People's Government mentioned that some localities are constrained by limited financial resources, and it is extremely difficult to promote the work of debt reduction, and it is no longer possible to effectively solve the problem by relying on their own capabilities.
In order to guard against local debt risks, the Politburo meeting on July 24 proposed for the first time to formulate and implement a package of debt reduction plans.
Under the promotion of the Ministry of Finance, more than 20 provinces, including Guizhou, Yunnan, Hunan, Inner Mongolia and Liaoning, have issued a total of more than 1.3 trillion yuan of special refinancing bonds to repay existing debts. This is also widely believed by the market to be used to replace part of the stock of implicit debt.
The People's Bank of China and other financial departments have also issued policies to guide financial institutions to negotiate with financing platforms on an equal footing in accordance with the principles of marketization and rule of law, and to implement classified policies to resolve existing debt risks and strictly control incremental debts through extension, borrowing new to repay old ones, and replacing them. The central bank has even stated that it will provide emergency liquidity loan support to areas with relatively heavy debt burdens if necessary.
Luo Zhiheng, chief economist of Guangdong Kai Securities, told Yicai that after the Politburo meeting in July put forward the "package of debt solutions", all localities actively promoted the resolution of debts in the region, and the strength, progress, effect and attention of all parties to the risk resolution of local bonds in 2023 are higher than those of previous debts.
"After the deployment of the central government, various departments and localities have successively explored and adopted practical plans, local debt risks have not evolved into financial risks and social risks, and short-term risks are being mitigated, which is conducive to making room for the establishment of a long-term mechanism in the medium and long term. Luo Zhiheng said.
Wang Qing, chief macro analyst of Oriental Jincheng, said that this year, in the context of the continuous decline in local government land transfer revenue, the urgency of resolving the risk of local debt has increased. Compared with previous years, this year has made new breakthroughs in the scope of debt resolution and specific plans, and clearly requires "the establishment of a long-term mechanism for the prevention and resolution of local debts". After the introduction of a series of debt measures, the risk of local debt has been significantly alleviated, among which the yield of urban investment bonds has dropped significantly, especially the yield of low-rated urban investment bonds has fallen even more, and there has even been a phenomenon of "crazy rushing" of urban investment bonds for a period of time.
In addition to the above-mentioned measures to directly convert fiscal and financial debts, there are also many measures to objectively support localized bonds this year.
For example, the central government recently issued an additional 1 trillion yuan of treasury bonds, all of which were allocated to local governments for disaster prevention, mitigation and relief, and post-disaster recovery and reconstruction through transfer payments, and the principal and interest were borne by the central government, without increasing the burden on local finances. "This is objectively conducive to alleviating the contradiction between local revenue and expenditure, and is conducive to reducing the pressure of localized debt. Luo Zhiheng said.
In addition, in early November, a new PPP mechanism was introduced, making it clear that PPP should be implemented in a franchise mode, focusing on user-paid projects, and not adding additional responsibilities for future expenditures of local governments due to the adoption of the PPP model. This is also conducive to avoiding some localities from taking advantage of this to add hidden debts of local governments.
The Ministry of Finance recently publicly stated that in recent years, through the continuous efforts of relevant departments and local governments, the mainland has established an institutional system to prevent and resolve local government debt risks, the spread and expansion of local governments' illegal and disorderly borrowing has been initially curbed, and positive results have been achieved in the disposal of local government debts. The scale of local implicit debt has gradually decreased, and the risk has been mitigated.
Balancing security and development is a difficult point
Not long ago, the Central Economic Work Conference mentioned that it would continue to effectively prevent and resolve risks in key areas when deploying next year's economic work. To coordinate the resolution of local debt risks and stable development, major economic provinces should truly take the lead and make greater contributions to stabilizing the national economy.
This means that resolving local debt risks will become a major priority in 2024.
Wang Qing said that the scope of the central government's local debt has been significantly expanded, and it used to emphasize the prevention and resolution of local government debt risks, but this year it has been expanded to resolve local debt risks. This means that after the implicit debt of local governments, all kinds of operating debts of local urban investment platforms will also be included in the scope of risk prevention and resolution. Behind the decline in the income of local government land transfers, the risks of various operating debts of urban investment platforms are also rising, and the inclusion of these debts in the scope of debt is conducive to fully controlling the risk of local debt, thereby reducing the possible disturbance to the macroeconomic recovery.
Mao Jie, a professor at the University of International Business and Economics, said that in order to prevent local debt risks, the current local debt statistics are more extensive, and some debts that were previously off-balance sheet have also been included in the monitoring. Due to the comprehensive statistics, the scale of local debt is larger, which also increases the pressure on local debt repayment in the short term. Some places that have previously stepped out of the debt high-risk warning have a high probability of returning to the high-risk zone. In addition, more types of off-balance sheet debt are included in the balance sheet for monitoring, and some related project financing will also be affected.
Mao Jie believes that the starting point of all-round statistics on local debts is good, but it is also necessary to balance risk prevention and development. In the future, while continuing to strengthen the supervision of local debts, it is necessary to continue to promote the market-oriented transformation of government investment and financing platform companies.
"Next year, the central government will continue to support localized bonds, such as the possible issuance of special refinancing bonds. Although it is only a conversion of the form of debt, local government debt has not been reduced, but it is necessary because some implicit debts have been made explicit. Mao Jie said.
Wen Laicheng, a professor at the Central University of Finance and Economics, believes that at present, the economic and social development of various provinces is unbalanced, and the debt risk is also different. However, the risk of large economic provinces is relatively low, and it is necessary to accelerate development to stimulate national economic growth.
"Next year, we must balance debt resolution and economic growth in the management of local government bonds, and on the one hand, we will continue to issue local government bonds with a total amount of not less than 9 trillion yuan this year to promote economic growth and risk resolution. On the other hand, it is necessary to ensure that government debts are repaid on time and that urban investment bonds are paid on time without default. Wen Laicheng said.
Yuan Quanquan, senior R&D director of CSI Pengyuan, said that the biggest feature of this year's localized bonds is the strong support given by the central government. Special refinancing bonds are expected to continue to be issued next year. The financing supervision of urban investment companies will continue to be tightened, and the platform companies in the official list will be supported to borrow new ones to repay the old, and gradually eliminate the stock of hidden debts through special refinancing bonds and other means. However, the debt risk of platform companies not included in the list may be borne by the investors themselves, so as to realize the separation of the old and the new hidden debts and avoid the disorderly expansion of risks.
Wang Qing believes that considering that the revenue from local government land transfer fees is likely to decline further in 2024, it is expected that special refinancing bonds will be issued on a larger scale next year, with a preliminary estimate of between 2 trillion and 2.5 trillion yuan. More importantly, in 2024, the restructuring of the operating debt of the urban investment platform will be comprehensively promoted, and with the full participation of policy banks and various commercial banks, the existing debt of the urban investment platform will be "replaced" and "extended and reduced interest rates" on a large scale. This will be the most powerful measure to alleviate the risk of local government bonds in the short term.
Luo Zhiheng said that there is little room for continuing to issue large-scale special refinancing bonds next year, and the current local government debt balance limit has been greatly reduced, and the local government debt balance limit is about 1.4 trillion yuan as of December 18.
The Central Economic Work Conference demanded that next year's proactive fiscal policy should be moderately strengthened, and the quality and efficiency should be improved. Wang Qing said that in order to coordinate the resolution of local debt risks and stable development, in the context of "moderate strengthening" of fiscal policy, it is expected that the target fiscal deficit rate in 2024 will be set at about 3.5%, and the new deficit will be mainly borne by the central government, and the scale of new local government special bonds will also reach about 4 trillion yuan in 2024, an increase of 200 billion yuan from the previous year.
"From the perspective of effectively preventing and resolving risks in key areas, it is necessary to further strengthen the support policies for the real estate industry in 2024 and guide the industry to achieve a soft landing as soon as possible. This plays an irreplaceable and important role in resolving local debt risks. Wang Qing said.
In Luo Zhiheng's view, the use of special refinancing bonds and other debts is a symptomatic treatment, not a root cause. The focus of next year's and future debt transformation is to promote the transformation of urban investment platforms and curb the soil for implicit debt generation through the linkage reform of institutional mechanisms. While stabilizing the macro tax burden, it is fundamental to clarify the relationship between the government and the market, define the responsibilities and scale of the government, and solve the problems of excessive government functions and excessive expenditure responsibilities with unlimited responsibility.
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