China should issue 30 trillion yuan (US$4.2 trillion) in treasury bonds to swap local governments’ hidden liabilities to re-energise growth momentum and cut off financial risks at their root, a Beijing-based think tank has proposed.
Such a move, combined with a few trillion yuan worth of additional bonds to shore up the property market, boost consumption and remove excessive industrial capacity, would be a strong step toward resolving China’s local-level debt and real estate crises once and for all, according to a report released by Tsinghua University’s Academic Centre for Chinese Economic Practice and Thinking (Accept).
“The economy is beginning to show signs of stabilisation, but significant risks still remain beneath the surface,” Liu Peilin, the centre’s chief research fellow, said while discussing the report at a macroeconomic forum hosted by the institute on Wednesday. “At the root of the problem is high local government debt, which has disrupted economic and financial operations.
“What’s needed is a comprehensive policy package – more specifically, a package of more proactive fiscal measures.”
China rolled out a 12 trillion yuan (US$1.67 trillion) debt swap in late 2024 – a move that significantly eased the repayment pressure on local authorities, as the Ministry of Finance had identified a total of 14.3 trillion yuan in local government hidden debts by the end of 2023.
However, there are still tens of trillions of yuan worth of local-level debt unidentified by the ministry as government liabilities, but they remain a ticking debt bomb because they are owed by state-owned enterprises, local financing vehicles or exist in other forms.
According to Liu, the large-scale debt-swap plan would not raise China’s overall leverage ratio, as the debt is already on the books. It would simply involve the central government issuing bonds to assume the liabilities from local governments, effectively shifting the debt burden to a different entity.
Meanwhile, the move would also allow high-cost debt to be replaced with lower-interest bonds, which could help revive economic activity.
Specifically, the report proposed issuing 4 trillion yuan in treasury bonds to clear unsold housing inventory by converting it into affordable housing, as well as trillion-yuan bonds to help absorb industrial overcapacity and to boost domestic consumption.
“If the 4 trillion yuan treasury bonds are issued to buy half of the real estate inventory and convert it into affordable housing for migrant workers, it would effectively revitalise the property market,” Li Daokui, director of Accept and a former adviser to China’s central bank, said at the same forum.
China’s economy has maintained an upwards momentum in 2025, with GDP growing by 5.4 per cent in the first quarter. Despite US tariff hikes, China’s export growth stood at 7.2 per cent during the January-May period.
However, with a weak job market, particularly for the youngest workers, as well as a staggering real estate sector, deflationary pressures and declining manufacturing profits due to intense competition, economists at the forum warned that the economy still faces significant long-term risks.
The fiscal capabilities of provincial and municipal governments, in the face of falling land-sale revenue and rising expenditure responsibilities, remain a concern, and the Tsinghua centre called for a change in the financing model.
Since local governments typically borrow funds for long-term infrastructure projects and then face shorter repayment terms, this is especially challenging for them, because land-sale income and tax revenue have sharply declined amid the prolonged property woes. As a result, they have to collect extra fees and increase non-tax revenues to maintain operations and pay off the debt.
Such a pattern – in which local governments face short-term pressure to repay public debt – should shift to a “public finance” model, where safe and liquid instruments such as treasury bonds are used to fund infrastructure projects, Accept director Li said.
“Treasury bonds are even safer than holding cash, and this is exactly what China’s financial system needs most,” Li added. “Yet, the volume of government bonds is far from sufficient, accounting for just over 25 per cent of GDP.”
He said China should embrace the concept of “public finance” and move away from the mindset of managing the national accounts like a cash register: i.e. treating each transaction in isolation, trying to cover debts in the short term, and rushing to repay as soon as funds are needed.
“Issuing ultra-long-term treasury bonds allows us to roll over the debt when it matures,” Li said. “This is how the state should manage its accounts and long-term investments, especially in infrastructure – through financial instruments.” - SOUTH CHINA MORNING POST
