Expert: The scale of the new round of debt replacement may reach 60 trillion to 100 trillion yuan

More than a year after the implementation of the comprehensive debt-to-equity swap plan, local governments continue to increase their efforts to reduce the stock hidden debts (referred to as "local hidden debts"). In order to alleviate the pressure of local government hidden debts, the Ministry of Finance plans to "increase the debt limit by a large scale at one time to replace the stock hidden debts of local governments." This will be the most significant measure of local hidden debt in recent years, and Minister of Finance, Lian Fo'an, referred to it as a policy "timely rain."

From the perspective of dealing with local fiscal pressures and promoting more hidden debts to be "revealed from hidden," conducting a large-scale stock hidden debt replacement is a necessary measure to address short-term risks and strengthen debt monitoring.

According to experts interviewed, the scale of the new round of debt replacement may reach between 60 trillion and 100 trillion yuan. Local governments can restart the issuance of "replacement bonds" or continue to issue "special refinancing bonds" and "special additional special bonds" to alleviate the risk of local debt defaults, helping local governments to focus more energy and resources on economic development and people's livelihood.

Large-scale hidden debt replacement to "decompress" localities

Since the beginning of this year, China's fiscal revenue growth has slowed down, and land transfer income has declined, leading to significant pressure on the balance of local fiscal revenue and expenditure. At the same time, the debt repayment pressure borne by some local grassroots finances remains high. Many local governments explicitly stated in the first half of the year budget execution reports that "the operation of grassroots finances is difficult, and the pressure to prevent and resolve risks is increasing." Under various factors, the pressure on some local areas in China to ensure "three guarantees" has increased.

Anhui Province clearly pointed out in the "Report on the Budget Execution in the first half of 2024 and the work opinions in the second half of the year" that some counties have relatively weak financial resources, the situation of "three guarantees" is relatively tight, and a few counties have a heavy debt resolution task, posing certain pressure on stable financial operations.

The essence of debt replacement is to "exchange time for space," that is, to convert high-interest, short-term remaining debt into low-interest, long-term remaining debt. Although it will not reduce the balance of hidden debts, it can effectively alleviate the pressure of concentrated debt repayment in the short term.

Wen Laicheng, a professor at the School of Finance and Taxation of the Central University of Finance and Economics, stated in an interview with Securities Times that currently, some local finances are in a dilemma, and the government's debt to enterprises cannot be ignored. Once the replacement funds are in place, it will effectively improve the operation of local finances, thereby significantly reducing the risk of local government debt defaults or explosions in the next two years.

Since last year, the Ministry of Finance has arranged more than 22 trillion yuan of local government bond quotas to support local hidden debts, with more allocated to high-risk debt areas. The upcoming debt replacement funds will be of a "large scale." He Daixin, director of the Fiscal Research Office of the Institute of Finance of the Chinese Academy of Social Sciences, pointed out to Securities Times that this hidden debt replacement is expected to comprehensively alleviate the debt and fiscal pressures of various provinces and regions, allowing local governments to free up more energy and financial resources to promote development and ensure people's livelihood.

Replacement scale may reach 60 trillion to 100 trillion yuan

There are various opinions in the market on how the most significant debt-to-equity measures in recent years will be implemented. In order to ensure that this local hidden debt significantly reduces the pressure, experts and scholars interviewed expressed that the estimated additional debt amount will be around 60 trillion to 100 trillion yuan With the help of large-scale debt replacement, more existing hidden debts will be made explicit, which will help local governments monitor and manage debts in the future. Wang Qing, Chief Macro Analyst at Orient Securities, analyzed to reporters that the one-time increase in the scale of local government debt ceiling this time may be around 10 trillion yuan, achieving the transformation of all existing hidden debts from "hidden" to "visible".

Wang Feng, lecturer at the China Institute of Public Finance at Shanghai University of Finance and Economics, holds a similar view. He pointed out to reporters that based on the scale of local government financing platform bonds, the new debt ceiling is expected to be around 11 trillion yuan.

Wen Laicheng believes that the main goal of this round of hidden debt replacement is to prevent the potential large-scale default risks in the field of hidden debts such as local government financing platform bonds that may occur in the next two years. "In short, its core purpose is to prevent the occurrence of default events."

He further pointed out that the scale of hidden debt replacement mainly depends on the amount of principal and interest of local government hidden debts due. From the actual situation, the total amount of principal and interest due on local government financing platform bonds each year is approximately around 3 trillion yuan. Considering the principal and interest requirements that may need to be met during the replacement, an annual hidden debt replacement of about 2 trillion yuan may be needed. Taking into account the fiscal capacity of the country in that year, if the replacement plan is implemented over three years, the total amount could reach around 6 trillion yuan.

Possibility of "Debt Replacement Bonds" Restart

Looking back at previous local government debt swaps, considering that the intensity of this round of local government debt swaps is "the largest in recent years" and will increase the debt ceiling, some experts point out that the form of this round of debt swaps may be similar to the first large-scale hidden debt swap that began in 2015.

From 2015 to 2018, local governments issued a total of 122 trillion yuan in replacement bonds, replacing existing government debts in non-bond forms, effectively alleviating the risk of concentrated repayment of local government debts. Tan Zhiguo, Deputy General Manager of China Investment Consulting Co., Ltd., told Securities Times reporters that the Ministry of Finance has clearly stated that the additional debt quota is specifically used to replace existing hidden debts, which can also be called "debt replacement bonds".

Several interviewed experts also pointed out that local governments may continue to issue "special additional special bonds". This is a type of additional special bond that local governments have been issuing since the fourth quarter of last year, which has not disclosed both the "two documents and one case" (project implementation plan, financial audit report, and legal opinion), and the specific investment direction of the raised funds is only briefly described as "for local government investment projects".

Some market experts speculate that "special additional special bonds" are actually used to resolve existing debts.

Regarding the upcoming new round of large-scale hidden debt replacement, Luo Zhiheng, Chief Economist at Yuekai Securities, pointed out that it can continue the current form of special refinancing bonds and "special additional special bonds", or restart the issuance of "debt replacement bonds", the latter being more standardized and more in line with the actual use of bonds. "However, to fundamentally solve the local debt problem, it is still necessary to restrain the generation of local hidden debts from the three dimensions of fiscal system, debt budget management, and urban investment transformation."

Authors: He Jueyuan, Guo Bohao, Source: Securities Times, Original Title: "Expectations for the 'Largest Intensity' of Local Debt Scale, Possibility of 'Debt Replacement Bonds' Restart"