After Nearly a Year, Debt Settlement Plans for Local Authorities Make Slow Progress Amid Abundant Caution (AI Translation)

【周刊提前读】金融化债审慎推进近一年 地方平台非标债务为何难置换

The comprehensive debt resolution plan to address local debt risks has been active for over a year. This plan employs a dual strategy: fiscal measures and financial restructuring. On the fiscal side, special refinancing bonds are issued for urgent debt repayments identified by the Ministry of Finance. Financial restructuring follows guidelines from "Document No. 35," issued by the General Office of the State Council, where large state-owned and policy banks engage in debt restructuring and swaps for financing platforms [para. 1].

One year later, the implementation of special refinancing bonds progressed rapidly, but market-oriented and law-based financial debt restructuring has been slower. The Central Politburo meeting on July 30, 2024, underscored the need for comprehensive local debt resolution plans and risk mitigation [para. 1]. Recent policy adjustments include "Document No. 134," which extends "Document No. 35" to June 2027 and expands the scope of debt resolution from 12 key provinces to the entire country, including more types of non-standard debt [para. 3].

The slow progress in financial debt restructuring is attributed to mismatches between local governments' debt resolution demands and banks' risk control requirements. Local governments prioritize resolving non-standard debts, preferring a unified approach, while banks require detailed project analysis and clear credit access criteria. This discrepancy, compounded by regulatory audits and strict accountability measures, results in banks exercising extreme caution [para. 5][para. 6].

"Document No. 134" aims to address these hurdles by extending the scope and applicable period of debt resolution policies. Yet, due to stringent debt conditions, its actual implementation remains uncertain [para. 7][para. 8]. Financial restructuring continues at a cautious pace, driven by regulatory concerns over new financing and debt expansion [para. 14][para. 18].

Despite efforts to resolve financial debts, the replacement of non-standard debts remains a significant challenge. Few banks have engaged in replacing non-standard debts, even in high-risk areas. Public data shows limited participation from local and joint-stock banks in debt restructuring [para. 42][para. 43]. Examples of successful replacements include syndicated loans in Chongqing and Ningxia, but these are exceptions rather than the norm [para. 45].

Non-standard debts continue to pose risks, frequently defaulting despite maintaining "rigid repayment" for public market bonds [para. 50]. This issue is exacerbated by the high costs, short terms, and low transparency of non-standard financing, which are particularly challenging under sluggish local finances [para. 51].

For financial debts in non-key provinces, progress has been slow, with many LGFV executives reporting no debt refinancing under "331" criteria. Banks' reluctance and LGFVs' concerns about signaling liquidity issues contribute to this stagnation [para. 57][para. 58].

To enhance debt resolution policies, decision-makers released follow-up documents like "Document No. 47" and "Document No. 14," aimed at controlling new government investments and expanding the debt resolution scope to more areas [para. 62][para. 63][para. 65]. However, stringent conditions outlined in "Document No. 134" continue to limit the restructuring of non-standard debt, allowing only debts meeting all five conditions to qualify [para. 85][para. 86][para. 87].

Chongqing has pioneered exploratory measures for LGFV platform exits, but the process remains complex and highly regulated. Local declarations of market-based operations don't equate to removal from financing platform lists maintained by regulatory authorities [para. 105]. Future standards could involve objective measures like the "335" standard for urban investment, ensuring a more structured approach to platform exits [para. 120].