In recent months, regional authorities in China have intensified efforts to issue bonds aimed at refinancing hidden debt, placing additional pressure on the financial system's liquidity. Data indicates that in the first two months of 2025 alone, local governments plan to issue a staggering 1.69 trillion yuan ($233 billion) worth of bonds, with approximately half of this amount designated for replacing off-balance sheet liabilities. This unprecedented volume has led to a significant tightening of cash flow within the banking sector as institutions scramble to absorb these securities.

The surge in bond issuance is part of a broader strategy initiated by the Chinese government in late 2024. Authorities approved a plan allowing regions to convert six trillion yuan worth of concealed debt into more manageable forms over a three-year timeframe. This initiative aims to alleviate interest payment burdens on local governments. To date, nearly 42% of the allocated two trillion yuan quota for this year has been utilized for such purposes. Analysts suggest that local authorities may be capitalizing on the period before the National People’s Congress in early March to maximize the issuance of these "swap bonds." With banks holding the majority of these bonds, they face increasing challenges in liquidity management.

As the Chinese government pledges greater fiscal support, expectations for increased government bond supply throughout the year are high. Vice Finance Minister Liao Min recently announced that the 2025 deficit-to-GDP ratio will rise. The impact of this heightened bond issuance on banks' ability to secure funding and purchase new bonds at higher costs could reverberate across both money and bond markets. Notably, the seven-day interbank repo rate has surged above broader market indicators, signaling tighter borrowing conditions for lenders. Despite some central bank interventions, the liquidity crunch remains unresolved. Moreover, data shows that over 60% of the issued debt-swap bonds have long-term maturities of 20 to 30 years, indicating a strategic move to lock in low yields for extended financing.

This proactive approach by local governments underscores the importance of addressing financial stability through prudent fiscal policies. By managing hidden debt effectively, authorities can enhance economic resilience and promote sustainable growth. Such measures not only bolster the financial system but also contribute positively to the overall economic environment, fostering confidence and stability in the market.