(Yicai) Oct. 27 -- China has slashed the number of local government financing platforms by more than 70 percent over the past two and a half years, as a package of policies to prevent and resolve implicit debt risks takes effect nationwide.

Thanks to joint efforts by central and local authorities, the number of financing platform companies and the amount of outstanding financial debt they hold fell 71 percent and 62 percent, respectively, by the end of last month from March 2023 levels, Pan Gongsheng, governor of the People’s Bank of China, said yesterday at the 18th Session of the Standing Committee of the 14th National People’s Congress.

As China accelerates efforts to tackle local government debt -- particularly implicit liabilities -- the rapid reduction in the number of local government financing vehicles (LGFVs) is a major step toward mitigating fiscal risks and safeguarding national financial security, Wen Laicheng, a professor at the Central University of Finance and Economics, told Yicai.

LGFVs are corporate entities established by local governments and their agencies, often functioning as quasi-public investment companies to raise funds for infrastructure and public welfare projects. Before China’s amended Budget Law took effect in 2015, local governments lacked legal authority to issue bonds, prompting them to rely on such vehicles for financing. Wen noted that with the new law allowing local governments to issue bonds directly, most financing platforms have fulfilled their historical mission and should gradually exit the stage.

The pace of LGFV closures has accelerated in recent years, reflecting the rapid rollout of the central government’s comprehensive debt resolution plan. In July 2023, the Ministry of Finance allocated over CNY2.2 trillion (USD309.3 billion) in local government bond quotas to help clear overdue payments and reduce existing debt risks. Under the debt package introduced last November, China plans to issue CNY10 trillion (USD1.4 trillion) in government bonds from 2024 to 2028 to replace an equivalent amount of implicit debt.

The continued existence of LGFVs has fueled the expansion of hidden local debt, Wen said. Accelerating their elimination will help address the root causes of implicit debt accumulation, he added.

Editor: Emmi Laine