China Raises Debt Ceilings

China's Ministry of Finance (MOF) plans to raise debt ceilings to address local "hidden debt." This hidden debt often comes from off-budget borrowing, mainly through local government financing vehicles (LGFVs). By raising the debt limit, China hopes to make this debt more transparent and allow for more stimulus spending.

However, there's a catch. If local governments are the ones to issue the new debt, it might only shift the debt from off-budget to on-budget without actually reducing it. But if the central government takes over, it could more directly ease the burden on local finances.

S&P Global Ratings notes that these measures could lead to larger deficits and higher debt levels in the short term. How this will impact China's credit rating depends on whether this approach becomes a lasting part of China’s fiscal strategy.

Since 2018, stricter policies have aimed to separate government debt from state-owned enterprise (SOE) debt, but more hidden debt could still come to light.