China navigates debt restructuring ahead of Trump 2.0

The debt swap programme offers a solution to China’s local government debt problem. By shifting hidden debt to higher-level local governments, local authorities can prioritise public spending, fostering economic development and improving public services. This strategic move marks a departure from previous fiscal tightening measures, which had hindered growth in some cash-strapped provinces this year.

However, a significant gap exists between the official government estimate of RMB14.3 trillion in hidden debt and other assessments, particularly those focused on Local Government Financing Vehicles (LGFVs). For example, the IMF estimates LGFV debt to exceed RMB70 tn in 2024 (see the below chart). Underestimating the true scale of hidden debt could therefore jeopardise the effectiveness of the debt swap programme.

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