(Yicai) Nov. 6 -- China’s comprehensive package to defuse local government debt risks is advancing at full speed, with the number of local government financing vehicles shutting down accelerating in the first three quarters of the year.

The number of local government financing vehicles plunged 92 percent as of Sept. 30 from the end of March 2023, according to the State Council’s Report on Financial Work released on the website of the National People’s Congress of China yesterday. In comparison, the number fell 74 percent between March 2023 and the end of last year.

Local governments and their departments, agencies, and affiliated public institutions establish financing vehicles through fiscal appropriations or by injecting land, equity, and other assets. Their hidden debts have rapidly expanded because of excessive borrowing and poor management by local government financing vehicles, posing significant risks to local economic and fiscal operations.

Support for resolving local governments’ hidden debt risks has achieved notable results, the State Council noted, adding that it will continue to urge localities to implement the debt-resolution package, steadily defuse financing platform debt risks, and accelerate the exit, reform, and transformation of financing vehicles.

The Report on Financial Work revealed that the exit of local government financing vehicles and debt reduction have both achieved promising results, Luo Zhiheng, chief economist at Yuekai Securities, told Yicai. Localities have effectively controlled the debt scale of urban investment platforms through debt swaps, maturity extensions, restructurings, and asset revitalization, slashing their outstanding financial debt and easing liquidity pressure.

The progress of local government financing vehicles exiting the market is in line with expectations, Wen Laicheng, professor at Central University of Finance and Economics, told Yicai. Based on relevant requirements, financing vehicles will likely be all gone by next year, he predicted.

After all financing vehicles are cleared out, China will still have to properly manage the relationship between government finances and ordinary state-owned enterprises, especially to prevent financing platforms from transmitting operating debt to local governments and local governments from illegally raising funds through SOEs, Wen pointed out.

The Ministry of Finance previously pledged to further break the expectation of government bailouts, advance the market-oriented transformation of financing platforms in a classified manner, foster sustainable fiscal development, and promote a virtuous mechanism with clear boundaries between governments and SOEs, well-defined responsibilities, and controllable risks.

China should also strengthen the self-sustaining capacity of urban investment firms, guiding financing platforms to shift from government project construction to market-oriented operations and to build stable operating income and cash flow, Luo said.

This should be supplemented with institutional reforms, including improving pricing and fiscal compensation mechanisms for public utilities, raising prices while providing targeted subsidies to low- and middle-income groups, and enhancing the sustainability of quasi-public welfare businesses, he added.

Local government debt risks remain generally safe and controllable. According to data from the Ministry of Finance, the outstanding balance of local government debt nationwide was about CNY60.65 trillion (USD9 trillion) as of Sept. 30, within the debt ceiling approved by the NPC.

Editor: Futura Costaglione