Fixing implicit government debt and its impact on urban investors

By Deng Ying, W&H Law Firm
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In the first few days of 2023, it had already been made clear that the year would again see an effort to resolve implicit debts of the government pushed forward, which will have a significant impact on the debt of urban investment companies.

On 5 January 2023, the Ministry of Finance publicly issued a reply to the Proposal on Further Preventing and Resolving Implicit Debt Risks of Local Governments, submitted by members of the National Committee of the Chinese People’s Political Consultative Conference in 2022. The reply clarified that “a market-oriented and rule of law-based debt default disposal mechanism should be established to prudently resolve the stock of government implicit debts and lawfully achieve a reasonable risk sharing between debtors and creditors”.

On 8 January, Guo Shuqing, the chairman of the China Banking and Insurance Regulatory Commission (CBIRC), also pointed out that “the orderly replacement of local government debts should be carried out to optimise the debt maturity structure and reduce interest rate burdens”.


Resolving implicit government debts
Deng Ying
Senior Partner
W&H Law Firm
Tel: +86 139 8060 9931

Since the implementation of the new Budget Law in 2015, which allows local governments to issue bonds, the State Council has issued a series of documents for classified management of local government debt, such as the Opinions on Strengthening the Management of Local Government Debt and the Emergency Plan for the Management of Local Government Debt Risks.

In July 2017, a Politburo meeting first proposed the concept of the “government implicit debt” of local governments, defining it as “local governments illegally borrowing, or borrowing indirectly”.

In the budget execution reports of various regions in recent years, local government implicit debt generally refers to: debts borrowed by local governments through direct or promised repayment with fiscal funds beyond the statutory government debt limit; debts borrowed illegally by providing guarantees, mainly including state-owned enterprises and institutions borrowing on behalf of the government; debts supported by government guarantees or fiscal funds; and the medium and long-term government expenditure debts of local governments formed through the agreed repurchase of investment principal or guaranteed returns during the establishment of government investment funds, the development of government and social capital co-operation (PPPs), government procurement of services, and other processes.


There are six main ways to resolve government implicit debt: Arrange fiscal funds for repayment; transfer government equity and operating state-owned assets rights and interests for repayment; use project carryover funds and operating income for repayment; convert to corporate operating debt through compliance; repay through refinancing or extension; and resolve through bankruptcy reorganisation or liquidation.

Among the above-mentioned debt resolution methods, Yunnan and Guizhou’s urban investment companies have attracted widespread attention from the market for resolving debt risks through debt restructuring.


According to a State Council notice, urban investment companies are economic entities established by local governments, and their departments and institutions, through financial appropriations or the injection of assets such as land and equity, which undertake the financing function of government investment projects and have independent legal person qualifications. Urban investment companies raise funds through borrowing to support local economic and social development, and play a positive role in strengthening infrastructure construction and coping with the impact of the international financial crisis. Their debt mainly includes bank loans, issuing standardised bonds, and non-standard debt financing.

In recent years, the overall debt burden of urban investment companies has increased. According to the Research Report on the Debt Risk of Local Governments and Urban Investment Companies, released by Lianhe Credit Rating, as at the end of June 2022 the debt burden of urban investment issuing bonds enterprises in various cities (prefectures) in Sichuan province had been on the rise.

The asset-liability ratios of Chengdu, Guangyuan and Mianyang issuing bonds enterprises were all above 65%, and all debt capitalisation ratios were over 57%, indicating a relatively heavy debt burden.


According to the latest Accounting Standards for Enterprises, debt restructuring refers to a transaction where the debtor and creditor agree, or a court orders, a renegotiation of the time, amount or method of debt repayment without changing the counterparty.

Debt restructuring mainly includes using assets to pay off debts (including cash payment below the book value of the debt, or non-cash assets to pay off debts), converting debt into capital, modifying other debt terms (i.e. extending debt repayment periods, extending debt repayment periods and charging interest, extending debt repayment periods and reducing debt principal or interest, etc.), and combinations of the above-mentioned three methods.

The relevant policy documents issued by the State Council and the Ministry of Finance state that, without increasing the size of local government implicit debt, “financing platform companies should be allowed to maintain capital turnover through appropriate extensions and debt restructuring in negotiations with financial institutions”.

Therefore, urban investment companies usually adopt financing through debt restructuring and other methods with financial institutions to maintain fund turnover without increasing implicit debt.

Recently, with the implementation of debt restructuring plans such as Yunnan Health & Cultural Tourism Holding, and Zunyi Road and Bridge Construction, there are operational models that urban investment companies can refer to, such as extending the bank loan period, adjusting the debt structure, and reducing financing costs through debt restructuring.

Yunnan Health & Cultural Tourism Holding prepaid its publicly traded bonds, adjusted its debt structure and reduced its financing costs. Zunyi Road and Bridge Construction’s debt restructuring only targeted bank loans, extending the loan period to 20 years, adjusting the annual interest rate to between 3% and 4.5%, and only paying interest for the first 10 years, followed by repayment in installments for the remaining 10 years.

It is worth noting that on 10 February 2023, the CBIRC and the People’s Bank of China officially released the Commercial Bank Financial Asset Risk Classification Method, which will be implemented on 1 July.

The method not only adjusts the relevant regulations for restructuring assets, but also specifies the conditions and observation period for the upward adjustment of non-performing restructuring assets, which objectively provides policy support for the implementation of debt restructuring by urban investment companies.

Deng Ying is a senior partner at W&H Law Firm. She can be contacted by phone at +86 139 8060 9931 or by e-mail at

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