China has unveiled an ambitious plan to relieve public debt, aiming to turn local governments away from belt-tightening practices that have exacerbated a domestic downturn.
Policymakers gathered in Beijing this past week approved a proposal to swap six trillion yuan ($840 billion) of hidden debt belonging to local governments for official loans with more favourable terms. Hidden debts are defined as borrowing for which a government is liable, but not disclosed to its citizens or to other creditors.
Here are some of the key points behind China’s massive debt shakeup:
Where is the debt hiding?
Much of local governments’ hidden debt in the past two decades was accumulated through state-owned companies known as local government financing vehicles (LGFVs). While the provincial and regional authorities themselves faced restraints on their own borrowing, LGFVs were less regulated and used for taking out loans and issuing bonds in order to finance infrastructure projects.
But local governments today are running out of infrastructure needs to meet, which means that newer projects, like extra bridges and conference centres, tend to make less money back as there is little demand for them.