(Yicai) Feb. 2 -- The overall risks associated with the local government debt remain generally safe and controllable, China’s finance ministry said, after its latest data showed that the country’s local government debt expanded 15 percent last year.

China’s local government debt increased by CNY7.29 trillion (USD1.05 trillion) to CNY54.82 trillion (USD7.88 trillion) at the end of last year from a year earlier, staying below the CNY57.99 trillion limit approved by the National People’s Congress, the Ministry of Finance announced on Jan. 30.

The main reason behind this rapid growth was the record-high scale of local government bond issuance in 2025. In fact, about CNY10.31 trillion worth of local government bonds were issued last year, CNY5.38 trillion in new local government bonds and CNY4.93 trillion in local government refinancing bonds, MOF data also showed.

Funds raised through refinancing bonds were used to repay matured principal of existing bonds and replace existing implicit debts, aiming to ease the debt repayment pressure on local governments. Meanwhile, funds from new local government bonds were mainly allocated to revenue-generating local infrastructure projects.

This is the first time the issuance scale of local government bonds has exceeded CNY10 trillion in a year, with refinancing bonds to replace maturing bonds as well as existing hidden liabilities accounting for nearly half of the total, Wen Laicheng, a professor at the Central University of Finance and Economics in Beijing, who is an expert in local government debt issues, told Yicai.

The Chinese government launched a CNY10 trillion replacement program for hidden local government debts to mitigate related risks in 2024. Under this program, CNY2.8 trillion worth of special refinancing bonds are expected to be issued every year for three years to replace existing implicit debts, achieving debt extension and interest rate reduction while alleviating local debt risks, Wen said.

The swift implementation of this program greatly contributed to the rapid increase in the local government debt balance, Wen believes. However, this process also converts implicit local government debts into explicit ones, reduces interest payments on local government debts, and extends debt repayment periods, thereby mitigating the risks associated with implicit local government debts, he explained.

About 87 percent of the principal of maturing local government bonds still relies on replacing them with new debts, which reflects the tremendous fiscal pressure faced by local governments, Wen noted. For some regions, particularly those with strained fiscal conditions, even the pressure of repaying bond interest remains substantial.

The principal of maturing local government bonds can be repaid with funds raised through newly issued refinancing bonds, but their interest must be paid with local fiscal funds, as the rollover practice is not allowed for interest repayment, according to MOF regulations.

The growth rate of China’s local government debt scale was much higher than that of the national economy and the average local fiscal revenue last year. In fact, the local governments’ general public budget revenue rose 2.4 percent in 2025 from 2024, while the budget revenue of their managed funds declined 8.2 percent, according to data from the MOF.

Local governments repaid a total of CNY3.03 trillion in matured bond principal last year, of which CNY2.62 trillion was through the issuance of refinancing bonds and about CNY410 billion (USD59 billion) with fiscal funds, MOF data showed. Meanwhile, local governments paid about CNY1.48 trillion in bond interest, up 9.6 percent from 2024.

Moreover, the average term of local government bonds issued in 2025 rose to 15.4 years from 14.4 years in 2024, and their average issuance interest rate fell to 1.97 percent from 2.29 percent in the period.

Even though the overall risks of local government debt remain safe and controllable, the local debt balance accounts for about 39 percent of the gross domestic product -- about CNY140.19 trillion (USD20.14 trillion) -- indicating that medium- and long-term risks associated with local government debts are accumulating, Wen said.

Therefore, the growth rate of the local government debt scale needs to be moderate. During this process, the structure of local debt should be optimized by increasing the proportion of general bonds and reducing the proportion of special-purpose bonds, and the central government should appropriately expand its borrowing capacity to reduce the debt burden on local governments, Wen proposed.

Editors: Tang Shihua, Futura Costaglione