BOFIT Viikkokatsaus / BOFIT Weekly 2018/17

The massive accumulation of debt by local governments has become a primary concern for Chinese economic policy. Over the past two months, officials have announced a number of new measures to bring the situation under control. As an initial measure, local administrations were ordered to implement by August a debt-swap programme that was initially approved in summer 2015. The programme calls for conversion of debt (mostly bank loans) of local governments to bonds. Officials hope the debt swap will make it easier to assess the debt situation of local governments and reduce their debt-servicing costs. Additionally, state-owned financial institutions are now banned from lending to local governments in any manner other than purchasing their bonds. Granting of new bank loans to off-budget local government financial vehicles (LGFVs) is also prohibited.

As of end-2017, local government debt exceeded 16 trillion yuan ($2.5 trillion) or 20 % of GDP. When LGFV debt is included, local government debt is estimated to well exceed 40 % of GDP.