1. Report Industry Investment Rating No information about the industry investment rating is provided in the report. 2. Core Viewpoints of the Report - Since 2025, rising interest rates have increased the issuance cost of local government bonds, and the decline in land revenue has led to a continuous increase in the interest - payment pressure of special bonds. The national - level interest - payment pressure is expected to reach 8.42% in 2025, approaching the 10% policy warning line. [3] - The pressure shows significant structural differentiation. Some provinces and most prefecture - level cities have already reached or exceeded the risk threshold, and the debt risk shows a trend of shifting from the grass - roots level to the provincial level. [3] - Although the growth of interest - payment expenditure is squeezing the space for other fiscal expenditures, due to the large base of existing debt, the marginal impact of the current interest rate increase is generally controllable. It is necessary for the market interest rate to rise by more than 80 basis points on the existing basis to touch the national warning line or exhaust the fiscal maneuvering space. Therefore, it is expected that the local interest - payment pressure will not trigger monetary policy easing in the short term. Interest rate cuts or adjustments to the bond term structure are more of a medium - to - long - term response logic. [3] 3. Summary According to the Directory 3.1 2025 Since the Overall Interest Rate Adjustment, Local Interest - Payment Pressure Has Risen - In 2025, the yield of 30 - year treasury bonds increased by 43 basis points to 2.27% at the end of the year compared with the beginning of the year. The yield of local bonds also increased, and the spread with treasury bonds widened significantly. The weighted average issuance rate of 30 - year local bonds in the primary market rose to 2.48%, significantly increasing the new financing cost of local governments. [6][15] - Since 2020, the government - funded budget revenue, the main source of repayment for special bonds, has declined due to the decline in land fiscal revenue. At the same time, the balance of local government debt has continued to accumulate, especially the rapid growth of special bonds, leading to a continuous increase in the national - level government interest - payment amount. In 2025, the national - level local government special bond interest payment is expected to be 960.2 billion yuan, and the total expenditure of local government - funded budget is 1,140.96 billion yuan (budgeted amount), with the national - level special bond interest - payment pressure expected to be 8.42%. [6][16] 3.2 Two Ways to Measure the Threshold of Local Interest - Payment Pressure - Policy - related regulations: According to the "Emergency Response Plan for Local Government Debt Risks" in 2016, if the annual interest - payment expenditure of special debt of a city or county government exceeds 10% of the government - funded budget expenditure of the current year, the debt management leading group or the debt emergency leading group must initiate a fiscal restructuring plan. [26] - The crowding - out effect on other fiscal expenditures: Even if the policy red line is not reached, the continuous increase in interest - payment expenditure will occupy funds that could be used in public services, infrastructure and other fields, affecting the normal function of finance. [7] 3.3 The 10% Critical Value of the Special Bond Interest - Payment Ratio - The general bond interest - payment expenditure of various calibers in China fluctuates around 2%, far lower than 10%. Therefore, the subsequent analysis mainly focuses on special bonds. There are only three cases of fiscal restructuring in China, but there may be other regions where the interest - payment pressure has reached the warning line but no fiscal restructuring has been initiated. [26] - The local government special bond interest - payment pressure is calculated as the special bond interest - payment expenditure divided by the government - funded budget expenditure. The general bond interest - payment pressure is calculated as the general bond interest - payment expenditure divided by the general public budget expenditure. [27] 3.4 From the Perspective of Fiscal Expenditure Structure, the Threshold of Interest - Payment Pressure - National level: Since 2020, local general expenditures have been gradually compressed, from 41% in 2017 to 37% in 2024. The proportion of key expenditures has increased, and the proportion of debt interest - payment expenditure in rigid expenditures has also shown an upward trend. [57] - Provincial and municipal levels: The proportion of interest - payment expenditure varies significantly. There is a negative relationship between the proportion of interest - payment expenditure and the proportion of general and key expenditures, and the general expenditure is more squeezed. [62] 3.5 After Reaching the Critical Threshold, Interest Rate Cuts or Shortening the Bond Duration May Occur - There are two potential ways to relieve the interest - payment pressure in the long term: one is to cut interest rates through monetary policy to directly reduce the interest rates of new and replacement bonds; the other is for local governments to adjust the issuance structure, shorten the bond duration, and replace some high - cost long - term bonds with short - term funds at lower interest rates. [9] - However, the average duration of new special bonds remains at a high level of about 14 years, and the issuance proportion of 30 - year bonds is close to 30%. The process of "shortening the duration" is slow in practice. [9][85] - Overall, in the current environment, the local government interest - payment pressure is relatively controllable. Interest rate cuts and shortening the duration are long - term logics. In the short term, attention should be paid to the direct impact of the increase in the supply of ultra - long - term local bonds on the bond market. [9][87]