At the 2026 Tsinghua PBCSF Chief Economists Forum held on September 19, Yu Yongding, a member of the Chinese Academy of Social Sciences, proposed that China should seize the current window of low price levels and available macro policy space to implement a more expansionary fiscal policy, arguing that the country can and should swap local government debt with central government bonds.

During the discussion, multiple economists noted that the central government should assume more responsibility in resolving local debt. Lin Yifu suggested drawing on the experience of disposing of non-performing bank assets, distinguishing the reasons behind the formation of local debt, and having the central government bear the debt incurred to support central policies. Yao Yang advocated that the central government issue more bonds and cautioned about the impact of local debt repayment on short-term economic activity. Yu Yongding emphasized that fiscal policy should pursue sustainability rather than merely seeking fiscal balance.

How much burden can be lifted from local governments if the central government borrows more? When debt is transferred from local to central levels, how can it avoid merely changing the entity bearing the risk? These discussions also touched on the next step of debt resolution: after lowering interest rates and extending repayment periods, how can local governments restore development capacity, how can enterprises recover overdue payments, and how can fiscal funds form effective investment?

Around these questions, Economic Observer conducted an exclusive interview with Yuan Haixia, president of the China Chengxin International Research Institute. Yuan Haixia has extensive research and consulting experience in macroeconomics, local debt and urban investment industry, credit risk, and the rating industry. She attended the Premier's Economic Symposium held on July 6, 2023. In her view, there is still room for the central government to add leverage, but its effectiveness depends on whether it can reduce the debt costs of the entire government sector and whether the use of funds can improve economic growth and public services. She particularly emphasized the urgency of clearing arrears: debt swaps can ease local repayment pressure, while paying off enterprise arrears can directly repair corporate cash flow.

Dialogue

Economic Observer: As local debt resolution enters deep waters, if the central government shifts more debt upward, will it merely move risk from local books to central books? What supports sustainability?

Yuan Haixia: Central government leverage does not equal simply "moving risk." The key lies in whether, after debt is shifted upward, the financing costs and repayment pressure of the entire government sector can truly be reduced. From current debt resolution practices, debt swaps have indeed produced certain results. The Ministry of Finance previously estimated that after local debt swaps, the average interest cost dropped by more than 2.5 percentage points, and it is expected to save more than 200 billion yuan in interest expenses over five years. If the central government replaces local high-cost, short-term hidden debt with lower financing costs and longer maturities, it is essentially not simply moving risk from one set of books to another, but rather using the central government's credit advantage to reduce the debt costs of the entire government sector while enhancing debt transparency.

What truly matters for fiscal sustainability is not the fiscal deficit ratio or debt ratio at a single point in time, but the relationships among several core variables: economic growth, financing costs, fiscal revenue growth, interest burden, investment structure, and the efficiency of "debt-to-asset" conversion. After the central government adds leverage, if interest expenses can be reduced while fiscal resources are invested in areas that raise productivity, improve public services, and expand effective demand, then debt growth can form a positive cycle with economic growth and the improvement of long-term total factor productivity. Conversely, if inefficient local debt is merely converted into low-cost central debt without changing inefficient investment and local fiscal constraints, it could indeed become "risk relocation." Japan's long-term low interest rates supported its debt and fiscal sustainability, but the expansion of public sector debt was concentrated in traditional infrastructure and oversupplied areas, which to some extent was one of the important factors behind its "lost two decades" or even "lost three decades." Therefore, when the central government adds leverage, it must calculate the big picture — it cannot ignore the economic account, but it also cannot look only at the economic account. When conducting performance assessments of government debt or public investment, categorization is needed: not only economic returns but also comprehensive benefits should be considered.

Economic Observer: Some researchers have proposed drawing on the approach of disposing of bank non-performing assets in 2000, using "central government bond issuance/swaps plus classified disposal" to resolve local debt. Can this approach be replicated today? Compared with the capital injection into the four major banks and the takeover of bad debts by asset management companies (AMCs) back then, where are the difficulties?

Yuan Haixia: The direction has aspects worth learning from, but it is not appropriate to simply replicate the historical model. Currently, there are two main difficulties. On one hand, the boundaries of rights and responsibilities of the rescue targets are completely different, making moral hazard difficult to control. In 2000, the targets were non-performing loans of state-owned banks, which were state-owned financial institutions directly managed by the central government. The attribution of bad debts was clear, and the purpose of disposal was to restore the credit function of the banking system, with benefits covering the entire national economy. Today, direct central government rescue of local debt faces stronger moral hazard constraints. The carriers of local debt are mainly financing platforms, whose legal identity is that of enterprises but which substantively perform government financing functions. The formation of urban investment debt often involves multi-level, multi-department intertwined decision-making, and there is a large gray area between hidden debt and platform operating debt. This means the boundary of "what the central government bears and what local governments bear" is far more complex than bank bad debts back then. On the other hand, the quality of underlying assets differs fundamentally — "being able to take over" does not equal "being able to resolve." Current urban investment business is still mainly in public welfare and quasi-public welfare areas, with the asset side largely corresponding to roads, pipelines, parks, and other assets that are difficult to generate market-based cash flow, with extremely weak liquidity. In 2000, AMCs could rely on the economic upswing and asset appreciation expectations to achieve recovery; today, AMCs taking over urban investment non-performing assets face a weak macro recovery, assets lacking cash flow, and a shortage of counterparties, lacking effective exit channels and monetization demand. Rashly taking over and disposing of such assets merely transfers risk from bank or urban investment balance sheets to AMCs or the central level, without achieving true resolution.

Economic Observer: Some views suggest that the triangular debt and overdue payments to enterprises derived from local debt amount to tens of trillions of yuan. Which is more urgent: clearing arrears or local debt resolution? When the central government issues bonds to swap local debt, should "government arrears to enterprises" be listed separately for priority repayment? Otherwise, can the economic cycle truly start turning?

Yuan Haixia: From the perspective of economic circulation, clearing arrears is more urgent than local debt resolution. The two operate in different time dimensions: hidden debt swaps address "existing financial risks," with effects reflected in easing local governments' current cash flow pressure and improving long-term debt sustainability, but enterprises do not directly receive funds; clearing arrears addresses "current economic circulation blockages," with effects directly reflected in the timely repair of corporate cash flow and employment. Government arrears to enterprises are the source of "triangular debt" — the government owes enterprises, enterprises owe workers' wages and suppliers' payments, and every link in the chain is passively contracting. Therefore, clearing arrears is not just a debt issue but a key to unclogging economic circulation. It is necessary for central government bond issuance and swaps to list "government arrears to enterprises" separately for priority repayment. The micro foundation of economic growth lies in enterprises being willing to invest and residents being willing to consume. If enterprises have tens of trillions of yuan in uncollectible government arrears sitting on their books for a long time, with cash flow continuously drying up, even if local government hidden debt is swapped into low-interest bonds, enterprises will not expand investment as a result. The essence of hidden debt swaps is "trading time for space," and that space comes from future economic growth; if the vitality of micro entities cannot be restored, that space cannot be discussed.

Economic Observer: How much room is there for the central government to add leverage? How much interest can be saved and how much fiscal space can be released by "swapping local high-interest hidden debt with central low-interest government bonds"? Under what circumstances will central government leverage shift from "stabilizing growth" to "overdrawing future policy space"?

Yuan Haixia: There is still some room for the central government to add leverage, but there is no fixed value. From the perspective of leverage ratios, China's central government debt scale and leverage ratio are both lower than those of local governments; compared with developed countries such as the United States and Japan, the central government leverage ratio is at a relatively low level. From the perspective of the balance sheet, China is a public ownership country. Over a long period, government departments and state-owned enterprises have accumulated a large amount of assets in promoting and leading economic construction. The government has strong state-owned asset support, which can provide guarantees for debt repayment. From the perspective of financing rates, in the current low interest rate environment, government financing rates are lower than economic growth rates. Under the framework of debt sustainability theory in the new stage, China's debt sustainability is relatively strong. From the perspective of domestic and external debt structure, China's government liabilities are mainly domestic debt, the domestic savings rate remains high, and external risk exposure is low, further raising the safety margin of government debt. Overall, there is still some room for the central government to add leverage. However, it should be noted that there is no fixed value for leverage space; it is related to many factors such as potential economic growth rate, government financial capacity, interest rate levels, asset stock, and monetary policy coordination. When evaluating, we should move beyond "absolute value" thinking on scale and place it within a composite framework of economic cycle changes, domestic and external situation evolution, and macroeconomic regulation orientation, making timely and discretionary decisions to achieve a balance between stabilizing the economy and debt sustainability.

The fiscal space released by central government swaps needs to be considered dynamically in light of actual conditions. According to previous Ministry of Finance estimates, after local debt swaps, the average local interest cost dropped by more than 2.5 percentage points. Based on this magnitude, a static estimate suggests that for every 1 trillion yuan of debt swapped, about 25 billion yuan in interest expenses can be saved per year; if 10 trillion yuan is swapped, the corresponding static interest savings would be around 250 billion yuan per year. Considering that central government debt financing costs are relatively lower, the interest savings would be even larger. But note that this is only a simple static estimate. The actual amount saved also depends on the original debt interest rate, new bond interest rate, swap maturity, early repayment, and other factors, and needs to be considered dynamically in light of actual conditions.

Economic Observer: How should we more comprehensively understand the impact and role of central government leverage?

Yuan Haixia: The real boundary of central government leverage is not a fixed debt level, but whether a sustainable positive cycle can be formed between debt expansion and economic growth and social development. The most valuable stage of central government leverage is through gradually assuming more counter-cyclical regulation and cross-regional, nationwide public investment functions, releasing comprehensive benefits that combine economic and social returns. The short-term benefits of many investments are not easy to see, but their role in improving infrastructure, filling public shortcomings, raising total factor productivity, and improving livelihood security will gradually be released over a longer cycle. At the same time, many public goods areas have strong externalities, long return cycles, and relatively high risks. Relying solely on social capital participation is insufficient, and there is a natural supply gap in the market. This is precisely where government departments, especially the central government, need to play an investment role.

Of course, this does not mean government debt can expand without boundaries. If new debt continues to be invested in inefficient projects and cannot form effective assets over the long term; if the marginal output of new debt continues to be lower than interest costs, the interest burden continuously squeezes fiscal flexibility, and economic and social benefits continue to decline, then the policy buffer space for responding to future economic fluctuations will be continuously compressed.