The pressure of repayment on special debts of local governments in China has intensified. On April 15, Fitch Ratings warned that in 2025, the proportion of interest expenditure on special debts of local governments in China’s total governmental fund expenditure could reach as high as 10%.
Fitch Ratings predicts that the proportion of interest expenditure on special debts of local governments in China in the total governmental fund expenditure has been significantly increasing, from 2.9% in 2019 to 7.6% in 2023, and it may reach 10% by 2025.
Since 2022, special debts have become the primary financing mechanism for infrastructure projects. In 2024, the Chinese Ministry of Finance announced a 1 trillion yuan debt swap plan to utilize special debts to replace implicit debts of local government financing platforms (such as urban investment companies) within the next five years.
Despite recent decreases in issuance interest rates and extended loan terms, the increase in the balance of special debts has raised interest expenditures. It is estimated that last year, interest expenditures related to special debts were over 800 billion yuan.
Fitch Ratings stated that land sales revenue is the main source of repayment for special debts. Due to the sluggish real estate market and rising interest expenditures, the project revenues generated by special debts cannot fully cover their corresponding debts. New policies by the central government allow local governments to use fiscal subsidies and other project revenues for repayments, reducing short-term repayment risks. However, in the long run, local governments still rely on the profitability of their projects.
Given the challenges in accessing alternative financing, Fitch Ratings expects that the refinancing rate of special debts will remain high in the medium term, following an increase from approximately 78% in 2021 and 2022 to about 85% in 2023 and 2024.
At the same time, economically weaker regions face higher interest burdens, leading to tighter debt control measures and narrowing space for incremental financing. Financial flexibility is better for economically strong provinces, but they still face increasing debt pressures.