(Yicai) July 24 -- China’s local governments have doubled their debt in five years and that debt’s sustainability will be tested during the 15th Five-Year Plan period that starts next year, according to the chief economist at Yuekai Securities.

Local government debt management will undergo a profound change in the coming half decade, Luo Zhiheng said in an interview with Yicai. China should further restrain the growth of hidden debt by improving local fiscal management to ease liability risks and address the contradiction between ongoing local debt and fiscal balance, Luo Zhiheng said in an interview with Yicai.

As the local government debt pile grows, interest payments will take up an increasing share of fiscal expenditure, thereby impacting spending on the population’s of some financially weaker regions, Luo explained.

Local debts had doubled to CNY51.25 trillion (USD7.17 trillion) as of May 30 from CNY25.7 trillion at the end of 2020, according to the latest finance ministry data.

The increase in local debt during the 14th Five‑Year Plan period was driven by three main factors, according to Luo. First, in response to macroeconomic shocks such as the Covid‑19 pandemic, population aging, and a downturn in the real estate market, the state implemented more proactive fiscal policies to support economic growth, he said.

Second, China’s economic model is shifting from infrastructure‑led investment toward tech innovation and consumption‑driven growth, necessitating larger temporary outlays, which caused a temporary increase in investment, Luo said.

Third, the country has issued substantial volumes of local government bonds to replace hidden debt, which also drove up the overall debt balance, he said.

Hidden debts, or implicit debts, is taken on by local governments through their investment and financing vehicles. They are not included on local governments’ balance sheets and constitute a key financial risk. Since 2014, China has required local governments to raise funds through direct bond issuance to control hidden debt growth.

Even though some risks from hidden debt were eliminated with the establishment of local government financing systems during the 14th Five-Year Plan period, there are still signs of expanding hidden debts in some regions, Liu believes.

To resolve these problems, China must further strengthen full‑chain management of local government financing in the 15th Five‑Year Plan period, conducting lifecycle performance appraisals of funded projects to restrain borrowing, Luo advised.

At the same time, he suggested transforming state‑owned investment companies by introducing social capital, optimizing corporate governance, and gradually divesting their government‑financing functions, thereby turning them into market‑oriented enterprises with financial autonomy that do not rely on government credit.

Editors: Dou Shicong, Futura Costaglione