China’s campaign to ease local government debt starts yielding dividends.

It was when the local authorities turned to heavy borrowing after the 2008 financial crisis, Chinese Government immediately resorted to retaliatory measures. China’s debt relief campaign for local governments, launched last year, has delivered its first major success story after Inner Mongolia have qualified to exit from the central government’s high-risk list. The autonomous region was among the 12 province level jurisdictions flagged by Beijing for risky debt levels, and with its exit which had been revealed in a local budget review, and being discussed internally in late July, was only released to the public earlier this week.

Inner Mongolia, which boasts of the country’s top coal mine, and a major supplier of renewable energy and dairy products, had previously been forced to shelve a subway project in Baotou – the region’s second-largest city – because of financial risks. Local government debt, which accumulated after the 2008 global financial crisis, is widely seen as a ticking time bomb. It reached 51.95 trillion yuan (US$7.23 trillion) by the end of June, government data showed, driven by years of aggressive borrowing, especially through local government financing vehicles. The model became increasingly unsustainable, particularly as fiscal revenue from land sales had declined.

In September 2023, the State Council issued a directive targeting 12 high-risk province-level areas and called for debt control and restructuring over the following two years, along with support measures.

Under central government rules, regions on the list are barred from launching new government-funded projects – except for essential public services like water, heating and electricity. Local authorities must also suspend or delay projects that have used less than half of their allocated investment.

The high-risk regions included Tianjin, Inner Mongolia autonomous region, Liaoning, Jilin, Heilongjiang, Guangxi Zhuang autonomous region, Chongqing, Guizhou, Yunnan, Gansu, Qinghai and Ningxia Hui autonomous region.

Back in October 2024, the Ministry of Finance launched a 12 trillion yuan debt relief package, significantly easing local repayment pressures. In March this year, Ningxia’s top fiscal official said the region had applied to be removed from the list after meeting the necessary conditions. Jilin is also working to accelerate its exit, according to local officials at a provincial meeting in May.

Chongqing is expected to exit the list by the end of this year or in 2026, according to a late July research note by Huatai Securities, which said the government had pushed ahead with clear debt relief plans. “moving out of the high-risk list will reopen investment opportunities and inject new momentum into regional growth”, according to the research note. “Financial institutions are also expected to ease lending restrictions to these areas, helping alleviate their financing pressures”.

However, the report cautioned that as provinces shed their high-risk status, they may receive less central support and become more exposed to the whims of the market. Those with weaker finances could encounter increased funding challenges, the authors said. Till June, China had issued 3.8 trillion yuan in bonds to swap local government debt, lowering the average interest cost by more than 2.5 percentage points and significantly easing repayment pressures, according to an article by Finance Minister Lan Foan last week.

“The Finance Ministry will continue guiding local authorities in carrying out hidden debt swaps to actively and prudently mitigate local government debt risks”, Minister Lan Foan has said. “We must consolidate the progress made in exiting the list of key high-debt regions and guide local authorities to continue debt resolution efforts based on local conditions”, according to a statement released by the finance and economic committee of the northern region’s People’s Congress.

Team Maverick