1. A 2024 audit by the National Audit Office across nine provinces revealed that 132.6 billion yuan ($19.5 billion) in local government special-purpose bonds (SPBs) had been used problematically [para. 1]. This was not an isolated finding; previous audits had consistently uncovered inflated projected returns to secure approval, idle funds after disbursement, and redirected money for operating expenses or repaying unrelated debts [para. 2].
2. SPBs were introduced in 2015 as China’s version of municipal bonds, allowing provincial governments to finance public projects expected to generate enough revenue for repayment [para. 3]. Between 2018 and 2021, annual SPB quotas surged from 1.35 trillion yuan to 3.65 trillion yuan, making them a key tool for economic stabilization [para. 4]. Currently, there are about 40 trillion yuan in outstanding local government SPBs, representing the largest single category in China’s domestic bond market [para. 4].
3. The rapid expansion raises a fundamental repayment question: what if projects fail to generate sufficient returns? [para. 5] Luo Zhiheng, chief economist at Yuekai Securities, noted that SPBs must balance returns—they cannot be zero, nor so high as to compete with the market—creating a narrow middle ground [para. 6].
4. In December 2024, China launched an SPB reform pilot in 10 provincial-level regions, shifting from central government approval to a “self-review and self-issuance” system [para. 7][para. 8]. In the first three quarters of 2025, pilot provinces utilized 93% of their annual SPB quotas on average, compared to 75% for non-pilot provinces [para. 9]. From January to April 2026, local governments issued 1.3 trillion yuan in new SPBs, representing 30.3% of the annual quota, up from 27.1% a year earlier [para. 10]. The pilot expanded to Chongqing, Jiangxi, Hubei, and Hebei in April 2026 [para. 11]. Under self-review, local governments bear full responsibility for project selection and repayment, making them notably more cautious in project evaluation [para. 12].
5. Since October 2024, when the Ministry of Finance authorized SPBs for acquiring idle land and buying unsold homes for affordable housing, real estate-related issuances have surged [para. 13]. In the first quarter of 2026, such issuances rose 42% year-on-year to 225 billion yuan, accounting for 19.4% of all new SPBs [para. 14]. Unlike earlier land reserve SPBs during the shantytown transformation boom, the current focus is on revitalizing already-acquired idle land rather than purchasing new plots [para. 15]. However, municipal and industrial park infrastructure remains the largest category, receiving 6.7 trillion yuan in SPB funds from January 2020 to April 2026, or nearly 31% of all new SPBs [para. 16].
6. Repayment concerns are growing. In the most recent fiscal year (likely 2024), interest expenditure on local government bonds grew nearly 10% to 1.48 trillion yuan, and as a share of local fiscal revenue, interest payments reached a record 8.5% [para. 17]. Fitch Ratings estimated that SPB interest spending as a proportion of total local government-managed funds surged from 2.9% in 2019 to 7.6% in 2023, on track to hit 10% in 2024 [para. 18][para. 19]. That level approaches the threshold requiring a fiscal restructuring plan [para. 20]. The structural problem is that SPB repayments have heavily relied on land sales revenues, which have fallen sharply since the real estate slump began in 2021 [para. 21].
7. Wang Dehua, a researcher at the Chinese Academy of Social Sciences, framed the core dilemma: whether SPBs should remain strictly self-financing project bonds or be formally acknowledged as economic stabilization tools [para. 22]. At present, Beijing is doing both—accelerating issuance to support growth while tightening project discipline to address waste [para. 23]. Wang suggested that clarifying the primary role of SPBs could be the first step toward resolving this tension [para. 23].
AI generated, for reference only
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