China has pledged to accelerate local government debt resolution, declaring that the current five-year 10 trillion yuan ($1.38 trillion) bond swap program is on track and will be completed on schedule.

The latest announcement follows an executive meeting of the State Council, the country's Cabinet, on Saturday, which reviewed progress on the sweeping debt-relief package launched in 2024.

The program, designed to run through 2028, allows local governments to issue bonds to replace outstanding hidden debt — a legacy of off-balance-sheet borrowing that had ballooned to 14.3 trillion yuan by end-2023.

By end-2024, data from the Ministry of Finance showed that hidden debt had fallen to about 10.5 trillion yuan, and according to estimates by Luo Zhiheng, chief economist at Yuekai Securities, it further dropped to roughly 7.4 trillion yuan by late 2025.

As of early May this year, more than 1.3 trillion yuan of local government refinancing bonds had been issued to swap for remaining hidden debt, said local financial authorities.

"The debt-reduction effort has moved to routine supervision. Hidden debt has been sharply reduced, with several provinces completing their annual targets ahead of schedule and some achieving a 'zero hidden debt' goal," Luo said.

The average interest cost on swapped debt has fallen by more than 2.5 percentage points, and the share of high-interest and nonstandard debt has declined, freeing up fiscal space for local governments, said the ministry.

The State Council meeting acknowledged that while initial results are encouraging, challenges remain.

Two priority areas for the next phase were identified: clearing overdue payments to enterprises — a persistent drag on business confidence — and managing the operating debt of local government financing vehicles (LGFVs).

"Local governments are still under financial strain, and some are unable to fully resolve arrears owed to businesses," said Wang Qing, chief macroeconomic analyst at Orient Golden Credit Rating International.

Wang called for continued use of special bonds and other fiscal tools to settle these obligations, which he said are essential to "smooth the economic circulation and thus help stabilize the macroeconomy".

Policymakers are also turning greater attention to the operating debt of local government financing vehicles — a new front in the country's campaign to defuse financial risks.

Unlike hidden debt incurred implicitly by local governments, the operating debt of LGFVs arises from market-oriented investment and project activities, and is classified as standard corporate debt. The primary tool for resolving such debt is financial restructuring through banking and capital market institutions, not direct fiscal swaps, Luo said.

"Financing platforms have relatively weak cash flow and profitability. Under certain conditions, their operating debt could require implicit government guarantees. It is necessary to proactively resolve this through financial tools that lengthen maturities and optimize structures."

China, in this year's Government Work Report, has called for greater financial and fiscal support for debt restructuring, along with measures to facilitate the reform and transformation of LGFVs. Under the current resolution plan, many localities are pushing to complete the exit of all financing platforms by June 2027 — a key step to curb new hidden liabilities.

But Luo cautioned that the task is far from finished.

"Exiting the platform in name is not enough. The real challenge is the transition from financing platforms to industrial investment firms. That requires injecting quality assets, integrating local resources and building market-oriented incentives so that these entities can stand on their own."