The local government debt restructuring in the Chinese Communist Party has entered a new stage, with authorities accelerating the push for local financing platforms to exit the government financing system. While city investment entities can exit the stage, the massive accumulated debts from the past will not disappear. As financing tools gradually withdraw, who will ultimately bear these debts?
One of the core measures of the new round of debt restructuring launched in 2024 is to replace existing high-interest, short-term implicit debt with low-interest, long-term local government bonds.
In March 2025, Chinese Finance Minister Lan Fo’an stated that the replacement could achieve “high-interest debt-to-low-interest rate transformation.” He cited that the issuance of 2 trillion yuan replacement bonds in 2024 led to an average interest rate reduction of over 2.5 percentage points, with an expected interest expenditure reduction of over 200 billion yuan in five years.
In November 2024, Lan Fo’an announced the arrangement of a 6 trillion yuan debt quota to replace local government existing implicit debts, to be implemented over three years from 2024 to 2026, at 2 trillion yuan per year. A report released by the Standing Committee of the National People’s Congress on August 25 indicated that by the end of July 2026, 5.73 trillion yuan of the planned 6 trillion yuan replacement bonds had been issued, resulting in a savings of approximately 600 billion yuan in interest expenses.
In other words, the primary focus of this debt restructuring is to address debt costs and term issues: high-interest, short-term debts are being swapped for low-interest, long-term local government debts. The debts themselves have not disappeared but have been partially transferred from off-balance sheet to the government’s balance sheet.
In the past, local governments were constrained by statutory debt issuance limits, leading some localities to utilize financing platforms, commonly known as “city investment companies,” to undertake infrastructure development and financing functions. Some city investment companies used assets like land as the basis for financing, raising funds through bank loans or issuing investment bonds.
However, with the cooling of the real estate market, the decline in land prices and land transfer revenues has put pressure on the assets and cash flow of some city investment companies, exposing the long-accumulated debt risks of local governments. As the disposal of local debt risks progresses, regulatory authorities are also pushing for the exit of local financing platforms from the government financing system.
The issuance of the “Notice on Regulating the Exit of Financing Platform Companies” in late August requires local government financing platforms to exit the list of financing platforms by the end of June 2027. According to the Securities Times, the “platform exit” necessitates meeting three conditions simultaneously: zeroing implicit debts, divesting government financing functions and transforming into autonomous market entities that bear their own risks, and zeroing operational financial debts, or obtaining approval from financial debtors holding over two-thirds of the financial debt stakes.
This indicates that the authorities aim to gradually sever the financing relationships between local governments and city investment companies, transforming city investments from quasi-fiscal instruments supporting government financing functions to genuinely autonomous market-oriented entities.
The transition is already gaining pace. According to the Securities Times, by the end of 2025, over 82% of financing platforms nationwide had exited; since 2026, 226 city investment companies have announced their “platform exit.” However, Wang Feng, associate professor at the School of Finance and Taxation, Shanghai University of Finance and Economics, pointed out that some platforms completed a “procedural exit” between 2024 and 2025 through renaming, consolidation, or debt replacements without establishing independent market-oriented operations and sustainable profitability.
The “platform exit” does not mean that city investment debts have vanished or that all city investments have completed their transition to marketization. The focus now shifts to a more critical question: where have the accumulated debts gone after city investments have exited?
The 2025 Government Debt Report released by the National People’s Congress on August 31 revealed that by the end of 2025, the national government debt balance, including statutory and implicit debts, stood at 102.5 trillion yuan, with a debt ratio of 73.2%. Of this, government statutory debt was 96 trillion yuan, national bonds were 41.2 trillion yuan, and local government statutory debt was 54.8 trillion yuan. Through multiple rounds of restructuring, the balance of government implicit debt had decreased to 6.5 trillion yuan.
Looking at the overall debt of local government financing platforms, the estimates from the International Monetary Fund (IMF) are much higher. According to the latest IMF report on China, the debt of local government financing platforms (LGFVs) was approximately 71.4 trillion yuan in 2025, equivalent to 50.9% of GDP. The IMF’s calculation of government debt using a broader framework reached 177.5 trillion yuan, equivalent to 126.6% of GDP.
These figures are not contradictory; the key lies in the different statistical approaches. The official Chinese statistics cover what is recognized as government implicit debts, whereas the IMF includes all LGFV debts, including operational debts of city investment companies. The IMF also noted that the legal definition of China’s implicit debts is narrower, with its estimated LGFV debt scale being several times higher than the official implicit debt.
Changes in the debt structure can also be observed from the official data. At the end of 2023, local government implicit debt was 14.3 trillion yuan, decreasing to 6.5 trillion yuan by the end of 2025. During the same period, local government statutory debt increased from around 40.7 trillion yuan to 54.8 trillion yuan. This reflects that some debts have transitioned from off-balance to on-balance during the replacement process.
Therefore, debt restructuring primarily alters the “debt undertakings, financing costs, terms, and legal forms,” rather than making the principal vanish into thin air.
Since city investment debts predominantly existed in financial assets such as bank loans and bonds, banks also play a vital role in the debt restructuring process.
The IMF mentioned that LGFV debt restructuring includes extending bank loan terms, reducing interest rates, and refinancing with government debt. These measures can relieve short-term debt repayment pressures for city investments but may also squeeze bank interest income.
For banks, the disposal of some high-risk city investment debts through refinancing with government debt and other means could lead to a decline in short-term credit risks but may also put pressure on asset yields. Amid weak loan demand and narrowing net interest margins, banks’ profitability still faces challenges.
This is a notable aspect to watch as Chinese debt restructuring enters the second half: while local governments have reduced interest burdens through debt swaps, the financial system may need to assume some related costs at lower returns and over longer terms.
Therefore, the saved interest by local governments does not imply a cost-free economic system but rather suggests that the costs of debt restructuring may be shared across different sectors.
Even after city investment platforms exit the list of financing platforms, the debts will not automatically vanish. For local governments, the real test in the next phase will be whether they can control new debts after city investments gradually exit the financing tool and simultaneously mend the fiscal gap left by declining land revenues.
If the “first half” involved reducing interest and term pressures of existing debts through swaps, the “second half” will deal with how local governments can establish a fiscal model that no longer relies on leveraging for investments after losing city investments as a financing tool.