Mar 20, 2021 12:31 PM

Premier Li’s Pledge to Cut Government Leverage May Target Hidden Debt, Analysts Say

When Premier Li Keqiang talked about reducing the government leverage ratio this week, he was likely referring to the trillions of yuan in debt that local governments are implicitly on the hook for, analysts said.

At a State Council executive meeting (link in Chinese) on Monday, Li said that the government leverage ratio should be reduced this year.

Analysts are speculating that the effort will likely focus on implicit, off-balance-sheet local government debt because China’s 2021 fiscal budget doesn’t limit the amount of explicit government borrowing enough to reduce the leverage ratio on its own.

Li’s statement is the latest sign that local government debt — particularly the implicit variety — is back in the crosshairs of Chinese policymakers now that last year’s stimulus policies aimed at offsetting fallout from the Covid-19 pandemic have run their course. There is no official data on the amount of implicit local government debt, but a report (link in Chinese) by Bank of China Ltd. estimated that the implicit debt amounted to 49.3 trillion yuan ($7.6 trillion) at the end of 2019, or about half of China’s GDP that year.

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In Depth: Record Local Government Debt Is Back in Policymakers’ Crosshairs

In China, explicit government debt includes central government bonds, and local governments’ general and special-purpose bonds (SPBs). Implicit debt refers to off-the-books borrowing that local governments might still be called on to repay. Typically, this is debt held by local government financing vehicles (LGFVs), or through public-private partnership projects, shady loan contracts and other channels.

In a recent note (link in Chinese), analysts at brokerage Huaxi Securities Co. Ltd. forecast that outstanding on-balance-sheet government debt will reach 53.6 trillion yuan this year, taking into account local governments’ SPBs. They predicted that China’s real GDP growth would have be around 12% for the government leverage ratio, which only covers explicit debt, to remain unchanged this year. Considering how unlikely it is that China will record that level of growth in 2021 — as many economists are forecasting around 8% for the year — the Huaxi Securities analysts said that the government leverage ratio that Li mentioned may involve both explicit and implicit debt.

Analysts at GF Securities Co. Ltd. also believe that it is likely that leverage ratio that Li referred to is a broad measure that includes implicit local government debt, according to a note (link in Chinese) released earlier this week. Growth in implicit local government debt will need to slow if the broad leverage ratio is to be reduced, they said.

Leverage chart -1

Stimulus policies and expanded credit last year helped push up the country’s debt levels. Throughout last year, China’s government leverage ratio, which only covers explicit debt, rose 7.1 percentage points to 45.6%, the biggest jump in available data going back to 1993, according to data (link in Chinese) from the Center for National Balance Sheets (CNBS), a research center under a state-backed think tank.

At Monday’s meeting, Li also said policymakers aimed to keep the macro leverage ratio more or less stable this year.

The macro leverage ratio, which is calculated by adding up the government, household, and nonfinancial corporate leverage ratios, climbed 23.6 percentage points to 270.1% last year, the fastest growth since 2009, according to CNBS data.

Tang Ziyi contributed to this report.

Contact reporter Guo Yingzhe ( and editor Michael Bellart (

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