1. Report Industry Investment Rating No information provided in the report. 2. Core Viewpoints of the Report - In 2025, all provincial - level regions had positive GDP growth, with 18 provinces outperforming the national average. Most provinces saw an increase in general public budget revenue and an improvement in fiscal self - sufficiency. However, most provinces also had a significant increase in local government debt balances and an upward trend in government debt ratios. Only five provinces managed to reduce their urban investment interest - bearing debts [1][11]. - In 2026, both the central and local governments emphasize "taking multiple measures to resolve the operational debt risks of local government financing platforms". The central government has entered a new stage of "unified management" for debt resolution, and local governments have achieved positive results in resolving implicit debts and reducing the number of financing platforms in 2025, and have set clear goals for 2026 [3][32]. - Given the ongoing debt - resolution cycle and the attention paid to resolving operational debt risks, the default risk of urban investment bonds remains low. There are still some provinces' urban investment bonds with certain cost - effectiveness, but currently, the overall yield of urban investment bonds is low, and trading is needed to increase returns [4][42]. 3. Summary According to the Directory 3.1 Ten Strong Provinces Contribute Over 60% of GDP, Only Five Provinces Achieve a Reduction in Urban Investment Interest - Bearing Debts - **Economic Aspect**: The top ten provinces' GDP totaled 85.5 trillion yuan, accounting for 61% of the national economic aggregate. All provincial - level regions had positive GDP growth, with 18 provinces having a higher GDP growth rate than the national average of 5.0%. Tibet ranked first in GDP growth for three consecutive years. Chongqing's GDP exceeded Liaoning's in 2025 [11][12]. - **Fiscal Aspect**: Most provinces' general public budget revenues increased, and the revenue growth of major economic provinces rebounded. The growth rate of general public budget expenditures slowed down significantly, and the fiscal self - sufficiency rate of most provinces increased. The tax revenue ratio of half of the provinces increased [11][17][21]. - **Debt Aspect**: With the continuous implementation of the debt - resolution policy supported by "6 + 4" trillion yuan of local government bonds, the local government debt balances of most provinces increased significantly. All provincial - level regions' government debt ratios increased. Most provinces' urban investment interest - bearing debts (mainly operational debts) still increased to varying degrees, and only five provinces achieved a reduction [11][28][29]. 3.2 How Does the Central Government and Each Province View Debt Resolution in 2026? - **Central Government**: The central government emphasizes "taking multiple measures to resolve the operational debt risks of local government financing platforms", enters a new stage of "unified management" for debt resolution, continues to regard "resolving existing debts, curbing new debts, and promoting the transformation of financing platforms" as important tasks, and emphasizes the real transformation of financing platforms [3][32][36]. - **Local Governments**: In 2025, local governments achieved positive results in resolving implicit debts and reducing the number of financing platforms. In 2026, many provinces follow the central government's instructions and mention taking multiple measures to resolve operational debt risks. Some provinces also set goals for resolving implicit debts, debt management, and financing platform exit [3][40][41]. 3.3 Which Provinces' Urban Investment Bonds Still Have Cost - Effectiveness? - Short - term urban investment bonds (within 1 year) can be downgraded to an implied rating of AA -. Provinces such as Guizhou, Shanxi, Zhejiang, Gansu, Shaanxi, Guangxi, Shandong, and Yunnan have an average yield of over 2.1% and can be focused on. - For 1 - 3 - year urban investment bonds, they can be downgraded to implied ratings of AA and AA(2). Provinces such as Guangdong, Hubei, Anhui, Hunan, Jiangxi, Henan, Sichuan, and Chongqing have an average yield of over 2% and a large bond scale. - For urban investment bonds over 3 years, it is recommended to focus on AAA and AA + implied ratings in developed regions. Currently, the overall yield of urban investment bonds is low, and trading is needed to increase returns. If it is predicted that the yield will decline, high - elasticity entities can be preferentially invested in to earn more excess returns [4][42][45]. 3.4 Appendix: Debt - Resolution - Related Content in Government Work Reports and Fiscal Budget Execution Reports - **2025 Work Summary**: Each province has achieved certain results in resolving implicit debts, reducing the number of financing platforms, and clearing arrears to enterprises [52]. - **2026 Work Outlook**: Each province has set clear goals for debt resolution in 2026, including resolving implicit debts, managing debts, and promoting the transformation and exit of financing platforms [54][55][60].

Group 1 - The core objective of local debt management is to achieve the goal of clearing hidden debts by 2028 and completing the "retirement of platforms" by June 2027, with many regions already announcing significant progress in reducing hidden debts and the number of financing platforms [1][2] - In 2025, the average interest cost of local government debt decreased by over 2.5 percentage points after debt replacement, indicating a trend towards risk reduction in local government debt [1] - At least 34 cities have reported progress on their hidden debt clearance tasks since 2026, with some regions like Siping and Songyuan in Jilin Province achieving complete clearance [1] Group 2 - A total of 44 cities have updated their progress on repaying government arrears to enterprises this year, with regions like Baotou in Inner Mongolia and Jiuquan in Gansu exceeding their repayment targets [2] - The primary method for local debt management has been "debt-for-debt" strategies, with Henan Province issuing 1,227 billion yuan in replacement bonds and other debt instruments to alleviate repayment pressure [2] - The central government plans to allocate 800 billion yuan annually from new local government special bonds starting in 2024 specifically for debt management [2] Group 3 - In 2025, 372 financing platforms announced they would no longer undertake government financing functions, indicating a rapid pace of "platform retirement" [3] - The focus of local debt management is shifting from resolving hidden debts to addressing operational debt risks as the risks associated with hidden debts diminish [3] - At least 28 cities have acknowledged the operational debt risks of financing platforms this year, highlighting the need for stricter management and differentiation between enterprise and local fiscal debts [3] Group 4 - The Central Economic Work Conference emphasized the need for multiple measures to address operational debt risks of financing platforms in 2026, with state-owned enterprises expected to bear repayment responsibilities based on their own assets [4] - Following the large-scale "platform retirement," financing platforms are entering a "deep transformation" phase, focusing on enhancing their self-sustaining capabilities [4] - Local governments are implementing a series of supportive measures, including issuing government bonds and clarifying repayment responsibilities, to alleviate the financing pressure on platforms [4]

Group 1 - The core viewpoint emphasizes the importance of balancing development and security, with a focus on risk prevention and management as a key task for the upcoming economic work [1][2] - The article highlights the need for a systematic approach to prevent and mitigate major risks, reinforcing the idea that safety is foundational for development [1][2] - It stresses the importance of adapting to changes in the real estate market, advocating for policies that stabilize the market and promote high-quality development [2] Group 2 - The article discusses the necessity of addressing local government debt risks through optimized restructuring and management practices, aiming to prevent the emergence of systemic risks [3] - It calls for a proactive approach to debt management, emphasizing the need for a long-term mechanism that aligns with high-quality development [3] - The commentary underscores the importance of unity and strategic determination in overcoming challenges and risks in the economic landscape [3]

Core Viewpoint - The Chinese government is intensifying its efforts to manage local government debt risks by prohibiting new hidden debts and effectively promoting the clearance of local financing platforms, reflecting a stronger policy determination [2][5][6]. Group 1: Policy Changes - The Central Political Bureau meeting on July 30 emphasized the need to actively and steadily resolve local government debt risks and strictly prohibit new hidden debts [2][5]. - The government's approach has shifted from merely separating financing platforms from government credit to a more thorough requirement for the complete clearance of non-viable platforms, emphasizing "reducing quantity and improving quality" [2][5]. - The timeline for local financing platforms to exit is set to be completed by June 2027, with 2025 identified as a critical year for platform exits [5][6]. Group 2: Challenges in Implementation - Local governments face significant challenges in the clearance process, particularly in managing the large amounts of hidden debt accumulated over years [3][7]. - The transition from old financing platforms to new ones requires substantial cash flow to replace debts, which is contingent on support from higher authorities [3][7]. - The need for local governments to maintain financing capabilities while phasing out old platforms raises concerns about potential debt transfer to new or existing local state-owned enterprises [3][8]. Group 3: Historical Context - Local government financing platforms have evolved over the past decade, initially serving as vehicles for funding public projects but have increasingly become conduits for hidden debts [4][8]. - Previous government directives have aimed to regulate and clear these platforms, with significant milestones in 2010, 2014, and 2021 focusing on separating government financing functions from these entities [4][5]. Group 4: Future Outlook - The current financing policies are perceived as stringent, making it difficult to balance debt resolution with economic development needs, which may hinder the sustainable financing of local investment projects [8][9]. - There is a risk that the ongoing regulatory measures could lead to new issues such as "business patching" and "asset transfer," potentially resulting in a scenario where platforms exit but still rely on government projects [8][9].

Summary of the Conference Call on China's Debt Swap Program Industry Overview - The focus is on the **local government financing vehicle (LGFV)** debt risk in China, which has been a persistent issue due to mismatches between local government revenues and spending responsibilities [6][10][12]. Key Points and Arguments 1. **Debt Swap Program Progress**: - The Chinese government net issued **RMB 7.7 trillion** in bonds in H1 2025, more than doubling the **RMB 3.3 trillion** issuance in H1 2024, driven by the **RMB 10 trillion** debt swap program initiated in November 2023 [9][16]. - The debt resolution plan requires local governments to prioritize LGFV debt reduction and restrict new borrowing, leading to a significant slowdown in LGFV interest-bearing debt growth from **18.6%** year-over-year in 2020 to **4.6%** in 2024 [6][20]. 2. **Fiscal Spending and Cash Flow**: - Fiscal spending disruptions eased, and LGFV operating cash flows turned positive due to the debt swap plan, despite a **12%** year-over-year decline in land sales revenue [6][34]. - Local governments have utilized about **82%** of the **RMB 2.8 trillion** full-year quota for debt swaps in H1 2025 [16]. 3. **Challenges in Debt Management**: - Annual interest payments on LGFV debts remain high at **2.3%** of GDP, with over half of provinces facing interest payments exceeding **10%** of their expenditures [7][54]. - The debt service burden is still significant, with the overall local government debt-to-GDP ratio climbing from **57%** in 2019 to **81%** in 2024 [23]. 4. **Economic Impact and Future Outlook**: - The debt swap program is expected to provide a **50 basis points** potential GDP boost in 2025, but actual allocation favored high-risk regions less than anticipated, receiving only **35%** of the quota [42]. - Continued efforts to control debt growth and reduce financing costs are necessary to stabilize and potentially lower debt service costs, which is crucial for avoiding aggressive revenue collections and public sector salary cuts [56]. 5. **Long-term Solutions**: - Long-term solutions involve reforms of LGFVs, including commercialization, and addressing fundamental mismatches between local government revenue sources and spending responsibilities [7][57][59]. Additional Important Content - The report highlights the increasing reliance of LGFVs on short-term debt financing, with a deteriorating interest coverage ratio and cash-to-short-term-debt ratio [11]. - The debt swap program includes **RMB 800 billion** of special-purpose new bonds annually from 2024 to 2028, and **RMB 2 trillion** of refinancing bonds per year from 2024 to 2026 [18]. - The report emphasizes the need for major fiscal and tax reforms to address the fundamental issues of local government indebtedness [59]. This summary encapsulates the critical insights from the conference call regarding the ongoing challenges and strategies related to China's local government debt management and the implications for economic stability.