A critical period for China's high-quality development is underway, marked by challenges such as transitioning growth drivers, insufficient domestic demand, and a tight fiscal balance. Establishing a long-term government debt management mechanism compatible with this development phase has become a key objective in deepening fiscal and tax system reforms. Modern government debt serves as a vital governance tool for smoothing economic cycles, optimizing intertemporal resource allocation, and supporting national strategic goals.

However, in practice, China's government debt management system faces institutional constraints in areas like coordinating assets and liabilities, aligning macro and micro governance, and improving information disclosure and market discipline. This paper proposes several actions: first, a shift in fiscal philosophy to fully recognize the role of government debt in macroeconomic governance; second, building a macro governance framework that controls targets, empowers local autonomy for projects, and provides sufficient support quotas; and third, deepening the self-review and self-issuance reform to fully strengthen local governments' responsibility for independent project evaluation and information disclosure.

The Functional Role and Development Trends of Government Debt

Functional Role of Government Debt in Macroeconomic Governance

The functional role of government debt is undergoing a profound transformation within the evolution of national governance systems and fiscal theory. Traditional balanced budget theory views debt merely as a temporary financing tool to cover fiscal gaps, advocating for annual budget balance to constrain debt expansion. The development of functional finance theory and intertemporal analysis frameworks has given government debt a more proactive policy meaning, expanding its role to a key governance tool for smoothing economic cycles, optimizing intertemporal resource allocation, and serving national strategic objectives.

Currently, China's economy is at a critical stage of transitioning growth drivers, facing the dual constraints of slowing growth and a tight fiscal balance. In this context, it is necessary to objectively recognize and fully leverage the role of government debt in macroeconomic governance. From a macro perspective, when private sector investment and consumption are weak due to factors like weakened expectations or balance sheet repair, the government can expand debt financing to effectively take over the function of social credit expansion. This utilizes the multiplier effect of fiscal funds to counter demand contraction and deflationary pressures, playing a crucial role in stabilizing growth and expanding domestic demand. In terms of structural optimization, government debt is a vital funding source for public goods provision, correcting market failures, and directing resources to major infrastructure and strategic emerging industries. By forming public capital stock and improving economic development conditions, government debt not only stabilizes aggregate demand in the short term but also enhances long-term potential growth and economic quality. Thus, government debt serves both to stabilize macroeconomic operations and to promote resource optimization and support long-term development. Redefining government debt from a traditional "emergency financing tool" to a "normalized, fundamental fiscal policy instrument in macroeconomic governance" is a crucial theoretical prerequisite for improving modern debt management mechanisms.

International Trends in Government Debt Development: Functional Deepening and Governance Upgrades

Examining fiscal practices in major global economies, modern government debt management is deeply embedded in national governance systems, showing four typical characteristics. First, debt levels continue to expand, and risk assessment standards are shifting from static total constraints to dynamic sustainability analysis. With global economic slowdown, aging populations, and frequent major crises, government debt levels in major economies have generally risen long-term, clearly exceeding the 60% warning level set by the Maastricht Treaty. International institutions like the IMF are moving from focusing solely on whether the debt-to-GDP ratio crosses a line to adopting dynamic, multi-dimensional frameworks like Debt Sustainability Analysis (DSA).

Second, the role of debt financing in fiscal systems is becoming more normalized and fundamental. With weak economic growth and shrinking traditional tax bases, relying solely on tax revenue is insufficient to meet the rising public spending needs of modern states. Government debt has thus become an important institutional funding source supporting fiscal operations. This is especially evident after major shocks like the global financial crisis and the COVID-19 pandemic, where large-scale debt financing was widely used for economic stimulus, employment support, and social assistance programs. Third, the financial attributes of government debt are deepening, making it a key hub for coordinating fiscal and monetary policy. Since the 2008 global financial crisis, central banks in developed economies like the US and Japan have commonly purchased government bonds on a large scale for base money issuance and balance sheet expansion, making government bonds a core component of central bank assets. On one hand, the treasury bond market provides the main trading tool for central bank open market operations, serving as a key channel for adjusting market liquidity, guiding interest rates, and transmitting monetary policy. On the other hand, the yield curve is widely used as a risk-free interest rate benchmark, providing a pricing reference for corporate bonds, stocks, loans, and various financial derivatives.

Fourth, the scope of government debt statistics and monitoring is expanding, with information disclosure and regulatory systems becoming increasingly legalized and standardized. At the macro level, the IMF promotes extending government debt statistics to the entire public sector through international standards like the Public Sector Debt Statistics Guide (PSDS), strengthening continuous monitoring of various potential fiscal risks. At the micro market level, major developed economies have generally built multi-layered information disclosure regulatory frameworks and professional electronic information aggregation platforms, focusing on full lifecycle information disclosure from pre-issuance to the maturity period. This rigorous information disclosure and regulatory system underpins the institutional foundation for market-based pricing of government debt.

China's Government Debt Management Practice: Macro Coordination and Micro Empowerment

Balancing development and security, China's government debt management is undergoing an institutional transformation from scale control to efficiency enhancement, showing a trend of the central government strengthening macro-control tools and local governments exploring micro-autonomy mechanisms. First, the macro-control function of central government debt is continuously strengthened, and the debt instrument system is constantly innovating and improving. Facing real pressures like insufficient effective demand and private sector balance sheet repair during economic transition, the central government is gradually assuming the main responsibility for macro-level leverage. In terms of macro deficit planning, the proposed national fiscal deficit for 2026 is 5.89 trillion yuan, a record high. The central government deficit accounts for 86.4% of the national deficit, with all deficit increases allocated to the central level. This optimization of the deficit structure indicates a significant rise in the strategic role of government debt in counter-cyclical and cross-cyclical adjustments.

Building on this optimized macro leverage structure, the use of central government debt instruments is becoming more precise and diverse. China has issued ultra-long-term special treasury bonds for three consecutive years since 2024, with the first year issuing 1 trillion yuan and the subsequent two years increasing to and maintaining 1.3 trillion yuan. The scope of use for special treasury bonds has also expanded. In 2025 and 2026, 500 billion yuan and 300 billion yuan worth of special treasury bonds were issued, respectively, specifically to support large state-owned commercial banks in replenishing their core Tier 1 capital. In 2026, a 50 billion yuan special fund for fiscal-financial coordination to promote domestic demand was established for the first time. These debt funds are directed towards key areas like major national strategies and security capacity building, as well as large-scale equipment renewals and consumer goods trade-ins. These measures fully demonstrate that the central government is using debt tools to organically combine short-term growth stabilization, medium-to-long-term structural optimization, and the implementation of major national strategies, effectively accelerating the transformation of government debt from a traditional fiscal financing tool to a core instrument of macroeconomic governance.

Second, the investment direction of local government debt funds is continuously optimized, and micro-management mechanism reforms are steadily advancing. In terms of scope, local government special bonds in China have expanded from traditional areas like transportation infrastructure, municipal infrastructure, and industrial parks to include affordable housing projects, urban village renovation, new infrastructure, and forward-looking, strategic emerging industry infrastructure. Furthermore, the use and structure of debt funds are constantly improving. The scope and proportion of special bonds used as project capital have been further optimized, and related funds are coordinated for purposes like repaying overdue payments to enterprises, addressing micro-level risks, and improving the business environment. In micro-management, a pilot program for the self-review and self-issuance of special bond projects was launched at the end of 2024. The initial pilot covers 10 provinces, including Beijing, Shanghai, and Jiangsu, as well as the Xiong'an New Area in Hebei. As the reform shows results, the pilot was expanded in 2026 to include Hebei, Jiangxi, Hubei provinces and Chongqing municipality. This move, within the macro framework of central unified quota management, enhances local autonomy in project review, issuance timing, and fund management, effectively transitioning local government debt management from a model primarily based on administrative approval to one combining quota constraints with autonomous decision-making.

Core Contradictions in China's Current Government Debt Management

Insufficient Integration of Macro Debt Statistics and Asset Management, Need to Deepen the Concept of Asset-Liability Coordination

A cornerstone of modern macro-governance is establishing a comprehensive, objective asset-liability coordination assessment system. Currently, China's public sector holds vast amounts of high-quality state-owned assets and infrastructure stock. However, at the macro-statistical and management level, the correspondence between debt management and asset formation needs further refinement. On one hand, while explicit statutory government debt is fully included in budget management, some debt instruments with macro-control attributes are not yet fully reflected in normalized macro leverage ratio calculations. On the other hand, during local economic development, some local state-owned enterprises or local government financing platforms undertake quasi-public project construction tasks. Under traditional conservative debt concepts, management focus tends to be on controlling the overall scale of debt, relatively neglecting the high-quality public assets formed by the accumulation of debt funds. This discrepancy in the statistical scope of assets and liabilities, to some extent, affects the precise judgment of decision-making departments on the macro leverage ratio and true fiscal space, and is detrimental to systematic balance sheet repair and intertemporal coordination from a macro overall perspective.

Misalignment of Macro Governance Mechanisms, Tension Between Quota Control and Project Management

Within the current government debt management system, there is a structural contradiction between macro-governance coordination and micro-operational efficiency. Currently, while implementing debt quota management and macro aggregate control, macro-management departments often retain relatively intensive front-end review authority and intervention space over the specific project initiation, revenue assessment, and fund allocation of special bond projects. This management model has, to some extent, led to a misalignment of macro-governance mechanisms. From the logic of modern macro-governance, the function of macro-management departments should focus on setting macro-development goals, controlling the overall macro leverage ratio, and preventing systemic risks. However, in practice, central macro-governance has overly devolved to the micro-level review of specific projects. Due to inherent information asymmetry between macro-management levels and micro-project execution entities, macro-management departments cannot accurately conduct substantive risk reviews on tens of thousands of specific projects involving various complex assets. They often have to rely on checking formal compliance documents like project proposals and feasibility studies. This misalignment between macro-coordination means and micro-management goals, on one hand, leads to relatively long project review cycles, reducing the timeliness of converting macro-policy funds into physical work volume. On the other hand, overly intensive and strict front-end administrative micro-approvals can objectively induce moral hazard in borrowing entities, weakening their sense of responsibility in project planning and demonstration and later asset operation, leading to a phenomenon of emphasizing application over operation.

Mismatch Between Special Bonds and Projects Hinders Information Disclosure and Market Pricing Efficiency

With the gradual piloting and promotion of the self-review and self-issuance mechanism for local government special bonds, the focus of debt management should theoretically shift more towards the back-end. The core logic for its effective operation relies on true and accurate information disclosure to form market-based pricing and constraint mechanisms. However, due to the mismatch between special bond funds and specific projects, information disclosure and market pricing mechanisms face the risk of failure. In practice, there is a complex cross-mapping relationship between special bond funds and specific projects. The first phenomenon is bundling multiple projects into one bond issuance. Objectively, for similar projects with small financing scales and regional or industrial synergies, bundled issuance has its rationale. However, under the constraint of project financing revenue being "self-balancing," this mechanism can easily degenerate into a compliance tool for financial calculations. When the direct revenue of most single projects is low, some local governments tend to bundle projects from different fields, regions, and lacking inherent economic connections. The essence is to use the expected cash flows of a few high-revenue projects to smooth over or even cover the funding gaps of numerous low-revenue, purely public welfare projects. While this meets the regulatory requirement of a debt service coverage ratio in static calculations, in dynamic operation, because there is no actual cash flow pooling among sub-projects, the "self-balancing" lacks reliable financial support.

The second phenomenon is splitting a single project into multiple issuances over time. This aims to alleviate the conflict between the total financing needs of large-scale, long-cycle major projects and the single-period bond issuance limit. For such projects, local governments typically break down their financing needs, distributing them not only across different construction years but also matching them with multiple bonds of varying maturities in the same period. However, this severs the correspondence between the project's full lifecycle cash flow and the principal and interest repayment of a single bond. The overall revenue of a large project typically concentrates after completion, but short-term bonds issued earlier may face a maturity mismatch risk where principal and interest repayment is due before the project generates any actual cash flow. This means the characteristics of a single bond cannot truly reflect the overall operation and risk profile of the large project. The deep intertwining of these two phenomena results in a complex, network-like correspondence between fund flows and specific project assets. This not only makes the isolated evaluation of a single bond's expected revenue often perfunctory but also makes it difficult for institutional investors to accurately assess the true credit quality and repayment capacity of special bonds when facing a "project portfolio."

Furthermore, due to practical issues such as inconsistent statistical standards for local government bond information disclosure and a lack of standardized norms for third-party assessment reports, investors often tend to avoid assessing project-specific risks and instead rely on homogeneous expectations of local government creditworthiness. This ultimately prevents the bond market from performing its core function of credit pricing through risk premiums, leading to highly uniform bond issuance rates for projects with different risk-return profiles. This weakens the price constraint and screening function that financial markets should have on local government borrowing behavior.

Path to Building a Long-Term Government Debt Management Mechanism Compatible with High-Quality Development

Shift Fiscal Philosophy, Emphasize the Role of Government Debt in Macroeconomic Governance

The primary step in optimizing the government debt management mechanism is scientifically shifting fiscal philosophy. This requires re-examining the functional attributes of government debt and gradually eliminating conservative concerns about reasonable and legal debt issuance. During the critical phase of transitioning to high-quality development, the internal structural adjustment pressures and external uncertainty shocks facing China's macroeconomy are long-term and complex. This objectively requires fiscal policy to have more flexible intertemporal adjustment capabilities. Therefore, a more scientific and objective attitude is needed to recognize the essential nature of government debt in intertemporal resource allocation backed by national credit. In terms of policy direction, the management focus should be gradually shifted from static scale control to a medium-to-long-term fiscal sustainability governance framework centered on intertemporal balance and supported by a full-coverage government asset-liability assessment. This means forming a macro consensus: under the premise of ensuring the efficiency of debt fund allocation, necessary government debt financing is a strategic institutional tool for implementing counter-cyclical demand management, forming high-quality intertemporal public assets, and achieving national medium-to-long-term development goals.

Build a Macro Governance Framework of "Controlling Targets, Empowering Projects, and Providing Sufficient Quotas"

To rationalize the relationship between macro-control and micro-operations, it is necessary to steadily advance the structural optimization of the macro-governance framework. The core idea can be summarized as "macro control over targets, micro empowerment for projects, and sufficient support quotas." Under this framework, the functional focus of central macro-management departments should return to setting macro targets and allocating quotas. First, establish a quota determination mechanism guided by macro-governance targets and strictly implement a quota system. Debt quotas should be precisely linked to regional governance targets. The central government should control the direction of governance through total quota allocation, without intervening in the specific micro-paths to achieve these targets, thereby ensuring rigid constraints on macro leverage and governance performance. Second, clarify the boundaries of responsibilities. Except for areas involving major national strategies and national security, the central government should reduce administrative approvals for local general projects. Third, within the legal debt quota, grant local governments full autonomy in project decision-making, selection, and fund coordination. This will solidify local governments' main responsibility and prevent moral hazard at its institutional source.

Deepen Self-Review and Self-Issuance Reform, Strengthen Local Responsibility for Independent Evaluation and Information Disclosure

While granting local governments more micro-autonomy, it must be accompanied by strict and effective constraint mechanisms. Taking the deepening of the self-review and self-issuance system reform as an opportunity, a market pricing and risk evaluation system centered on true information disclosure should be comprehensively constructed. First, strengthen the "self-balancing" hard constraint on the financing revenue of special bond projects. On one hand, strictly standardize the initial project establishment procedures for special bonds and research and introduce a binding negative list for project applications. On the other hand, adhere to the basic guideline of a one-to-one correspondence between bonds and projects, ensuring a substantive match between project revenue sources and principal and interest repayment in financial logic. While adhering to the "self-balancing" principle, the boundaries for project bundling must be carefully defined, specifying scenarios where it is "strictly prohibited" and where "moderate relaxation" is allowed. Even if a bundling model is adopted, it must ensure that the term structure of cash flows is clearly identifiable. Second, build a standardized, unified, transparent, efficient, and binding information disclosure mechanism. Specifically, this requires improving the legal and regulatory framework for local government bond information disclosure from an institutional perspective, exploring the creation of a standardized template for local government bond information disclosure that combines "mandatory disclosure" and "voluntary disclosure." At the same time, relying on the continuously improving electronic platform for local government bond information disclosure, achieve data integration of ratings, audits, and daily management. Based on this, establish a robust reward and punishment mechanism for information disclosure, correspondingly increasing the legal liability and administrative accountability for providing false information or concealing major risk information.

References

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