A framework for refinancing and resolving local government debt is starting to take shape at the National People’s Congress this week, because of the burden that debt servicing costs are placing on localities, slowing growth. The extension of a program to swap local government debt into bonds, and the potential expansion of a new pilot initiative to allow China Development Bank to provide low-interest loans to replace implicit local debt indicate the broad direction of policy. While the size of any local debt restructuring remains unknowable at this point, both measures are consistent with a stronger fiscal policy impulse to fund infrastructure spending in 2019, while also reinforcing implicit government guarantees and moral hazard.
