(Yicai) March 10 -- China’s central government will issue a larger share of new debt than local governments this year for the second year in a row, as the country adjusts its government debt structure to alleviate fiscal pressure on local governments and reduce debt risks.

China plans to add CNY11.89 trillion (USD1.7 trillion) in new government debt this year, according to the full government budget published by Xinhua News Agency yesterday that was submitted by Finance Minister Lan Fo’an to the Fourth Session of the 14th National People’s Congress on March 5.

Some 56.3 percent of the new debt, amounting to CNY6.69 trillion (USD973.2 billion), will be issued by the central government in the form of treasury bonds, while the remaining 43.7 percent will be issued by local governments.

This marks the second consecutive year that new bond issuance by the central government exceeds that of local governments. Last year, the central government accounted for 56.2 percent of new bond issuance at CNY6.66 trillion, while local governments issued 43.8 percent at CNY5.2 trillion. From 2017 to 2024, however, local governments consistently accounted for a larger share of new bond issuance than the central government.

The share of new debt issued by local governments rose every year between 2015 and 2022, Luo Zhiheng, chief economist at Yuekai Securities, told Yicai. This is because local governments started to be allowed to issue bonds from 2015 when the new budget law was enforced. As a result, the quotas for special bonds issued by local governments to fund local infrastructure projects jumped each year.

However, an excessively high share of local government debt can lead to financial risks, Luo said. These risks include short borrowing cycles, high interest rates, weak repayment capacity and irregular borrowing practices.

An overly large share of local government debt increases the fiscal burden on local governments and raises debt risks, said Wen Laicheng, a professor at the Central University of Finance and Economics. By contrast, the central government has greater room to borrow, faces lower borrowing costs and can also use debt as an important policy tool to regulate economic and social activity.

Debt Rebalancing

This change in the proportion of new debt issued by the central government and local governments also reflects a shift in the purpose of government borrowing and the role debt plays, said Zheng Chunrong, a professor at the Shanghai University of Finance and Economics.

“In the past, when local governments accounted for a larger share of debt issuance, China was going through a period of rapid urbanization. Local governments needed to borrow heavily to undertake large infrastructure projects and provide basic public services. At that time, a higher share of debt issued by local governments was reasonable,” Zheng said.

But as the pace of urbanization slows, it is no longer so urgent for local governments to launch new infrastructure projects. Moreover, some local governments have begun to face debt risks, making it necessary to reduce their debt burden, Zheng said. At the same time, in order to respond to a more complex and volatile domestic and international economic environment, the central government now needs to raise funds for various economic stimulus measures. As a result, the central government’s share of borrowing has increased.

The share of new debt issued by the central government began to rise after October 2023, when the Central Financial Work Conference proposed optimizing the debt structure between the central and local governments. However, because local governments borrowed more than the central government for many years, their share of outstanding debt remains relatively high.

After excluding implicit local government debt, the Chinese government’s debt balance was CNY96.05 trillion (USD13.9 trillion) at the end of last year, according to data from the Ministry of Finance. Of this, central government debt totaled CNY41.23 trillion, accounting for 43 percent, while local government debt stood at CNY54.82 trillion, amounting to 57 percent.

Wen suggested the country should draw on the experiences of other countries and adjust the central and local fiscal systems to gradually hike the share of central government debt in total government debt to more than 60 percent.

Editors: Tang Shihua, Kim Taylor