China’s campaign to dismantle 14.3 trillion yuan ($2 trillion) in local government hidden debt is running ahead of its own timetable. In the first eight months of 2026 alone, combined issuance of special refinancing bonds and special new-purpose bonds earmarked for debt resolution exceeded 2.7 trillion yuan, pushing the cumulative deployment since 2024 beyond 6 trillion yuan — already clearing the ceiling of the original 6-trillion-yuan quota, according to a macro research report published Monday by Shenwan Hongyuan Securities chief economist Zhao Wei and his team.

The 2024–2026 window was always designed to be the decisive phase. Since Beijing launched its comprehensive hidden-debt governance program in 2017, the outstanding balance had been driven down to 14.3 trillion yuan by the end of 2023. The one-trillion-yuan-plus “package deal” announced in late 2023 set three pillars: 6 trillion yuan in special refinancing bond quotas to be deployed evenly across 2024–2026 (2 trillion yuan per year); 4 trillion yuan in special new-purpose bond quotas spread across 2024–2028; and 2 trillion yuan in shantytown renovation hidden debt to be serviced under original contracts. The stated goal was to bring the recognized hidden-debt stock to zero by the end of the 15th Five-Year Plan’s opening years.

Issuance Is Outrunning the Plan

What makes 2026 extraordinary is the velocity. The 2.7 trillion yuan issued in the first eight months alone compares with full-year deployments of roughly 2.5 trillion yuan in 2024 and 2.3 trillion yuan in 2025. February and June 2026 saw particularly aggressive drawdowns, with debt-resolution funds accounting for more than 40% of all local bond issuance in those months. The 6-trillion-yuan special refinancing bond quota — originally planned at a measured 2 trillion yuan per annum — has already been fully exhausted ahead of schedule.

The special new-purpose bond, likewise, has overshot. The instrument was designed for an even 800 billion yuan annual pace over five years. In practice, 2025 deployment reached 1.4 trillion yuan — nearly double the plan — and the first eight months of 2026 have already seen 890 billion yuan issued. Both core instruments are running ahead of the original schedule, leaving ample room for further compression of the hidden-debt stock.

A Tale of Two Coasts: Regional Divergence Sharpens

The national aggregate masks a widening split among provinces. As of end-August 2026, Jiangsu, Yunnan, Tianjin, Chongqing, and Jilin had already exhausted 100% of their annual special refinancing bond quotas. Qinghai, Heilongjiang, Shandong, and Liaoning, by contrast, had deployed less than 70% — suggesting either more comfortable starting positions or slower local execution.

The divergence is even starker when measured by the share of debt-resolution funds in total local bond issuance. Tianjin, Yunnan, Jiangsu, Guizhou, Heilongjiang, Hunan, and Xinjiang all channeled more than 50% of their local bond issuance into hidden-debt resolution. Beijing, Shanghai, and Shenzhen — regions with inherently low hidden-debt stocks and early risk clearance — allocated less than 5%.

On the special new-purpose bond front, Jiangsu leads the nation with over 100 billion yuan deployed, followed by a tier of Yunnan, Guangdong, Hunan, and Hebei, each exceeding 50 billion yuan. These five provinces have absorbed the lion’s share of the dedicated quota, reflecting both the scale of their original liabilities and the capacity of local fiscal bureaucracies to move quickly.

The Next Front: Urban-Development-Company Financial Debt

The recognized hidden-debt stock is only half the story. Zhao’s team points to a second, larger reservoir of risk: the financial debt incurred by local government financing vehicles (LGFVs) in their commercial operations. As of end-2025, more than 82% of financing platforms had formally “exited” the system, and the outstanding stock of LGFV operating financial debt had fallen by more than 74% relative to early 2023 — implying a remaining balance of roughly 5.1 trillion yuan that Zhao identifies as the “next key battlefield” for risk resolution.

The concern is not merely the size of the residual but its behavior. The “resolve on one side, add on the other” dynamic has proven stubborn. The Ministry of Finance’s August 2025 accountability circular — focusing on irregular borrowing in project construction — disclosed 141 billion yuan in newly detected hidden debt, a marked escalation in scale from prior rounds. The forms of evasion are also growing more sophisticated: beyond traditional tactics such as “fictitious debt resolution,” “irregular advance funding,” and “off-balance-sheet financing,” newer patterns including “irregular leasing” and “misappropriation of funds” are emerging, signaling that the generation mechanism for hidden debt is evolving even under intense pressure.

The Land-Revenue Squeeze Compounds the Pressure

The arithmetic of repayment is deteriorating. Interest payments on special bonds as a share of local government fund revenue have climbed from 5% in 2021 to more than 18% in 2025, meaning the government fund budget’s ability to cover bond coupons has more than tripled its strain. The revenue side offers little relief: in the first half of 2026, national government fund revenue fell 25% year-on-year. In the first quarter, most provinces — including Shaanxi, Hainan, Chongqing, and Liaoning — saw land-disposal-related income drop by more than 20%.

This is the crux of the challenge ahead. As land finance continues to deflate, the cushion that historically absorbed debt-service costs is thinning precisely when the maturing obligations from the 2015–2018 LGFV borrowing boom are reaching their peaks.

The Toolbox: Plenty of Dry Powder Remains

Zhao’s team argues that policy space is far from exhausted. Two of the three core instruments used in this round — special refinancing bonds and special new-purpose bonds — could be institutionalized as standing tools for ongoing stock reduction. Critically, local governments still hold over 1.1 trillion yuan in unused debt quotas as of end-2025, providing a ready reserve that can be activated without new legislative authorization.

For LGFV operating financial debt, three models have emerged from local experimentation:

• Financial coordination and substitution — using extended maturities, interest-rate reductions, and low-cost standardized funding to replace high-interest non-standard debt. Examples include a 1.8 billion yuan, 14-year structured syndicated loan signed in Weixin, Yunnan in 2025, and Chengdu’s first “331 non-standard debt” syndicated substitution.
• Debt custody and classification disposal — higher-credit provincial or municipal SOEs and asset-management companies taking custody of weaker LGFVs’ debt for centralized risk control. Shaanxi Financial Asset Management’s acquisition-and-restructuring of Hancheng LGFV debt in 2024 is a template case.
• Credit-tier elevation and “borrow-together-repay-together” — provincial credit backing unified financing to lower tail-region financing premiums. Guizhou’s Panzhou and Zunyi, as well as Shandong’s Weifang, have all issued private bonds under this mechanism.

Two province-level innovations deserve particular attention. Shanxi’s “transport model” consolidated provincial highway assets into a single provincial transport holding group, adopting a branch-company structure so that all revenue flows to a single debt-service pool, replaced short-term high-interest loans with long-term low-interest ones, and received phased provincial fiscal capital injections — structurally avoiding the creation of new hidden debt. Guizhou’s “Moutai model” transferred 4% stakes in Kweichow Moutai twice (2019 and 2020), with subsequent reductions generating roughly 66 billion yuan in cash, while Moutai Group’s financial subsidiary was authorized to directly underwrite and invest in local government bonds, effectively turning the spirits maker into a fiscal-policy instrument.

At the monetary level, the PBOC has repeatedly signaled readiness to act. Governor Pan Gongsheng stated in March 2025 that the central bank would, “when necessary,” provide emergency liquidity loans to heavily indebted regions. The report notes that structural monetary tools and special purpose vehicles (SPVs) — modeled on the 2020 micro-enterprise credit-support facilities — could be deployed to create a stable financial environment for orderly debt resolution.

Three Paths, One Destination

Zhao’s team distills the forward playbook into three categories of action:

• Debt reduction — compliant debt write-offs, market-based restructuring, and conversion of hidden debt into disclosed operating debt.
• Cost compression — scaled use of low-interest substitution and maturity extension to steadily lower the aggregate interest burden.
• Cash-flow enhancement — routine revitalization of idle state assets, market-based operation of state-owned equity, and LGFV market-oriented transformation to broaden repayment sources.

The deeper structural answer, the researchers argue, lies beyond any single instrument. Deepening fiscal and tax system reform, optimizing local fiscal revenue-expenditure structures, and cultivating sustainable local industrial and revenue bases are the only durable remedies. In a notable supporting data point, the 2026 central state-owned capital operating budget raises profit remittance ratios across the board: resource-monopoly enterprises (tobacco, petroleum, petrochemicals, power, telecom, coal) from 20–25% to a uniform 35%; general competitive enterprises from 15% to 30%; and special-function enterprises (military, railway, postal) from 10% to 20%. The move is expected to channel significantly more SOE profit into the central fiscal pool, indirectly relieving pressure on local balance sheets.

The report’s overarching message is that China’s hidden-debt resolution has crossed the threshold from “crisis management” to “institutional reconstruction.” The 14.3 trillion yuan stock is being methodically driven toward zero; the 5.1 trillion yuan LGFV operating debt is being corralled through financial coordination, custody, and credit-tier elevation; and the 1.1 trillion yuan of reserve quota stands ready for any contingency. But the true test lies beyond the numbers — in whether Beijing can simultaneously close the door on new hidden-debt creation while rebuilding the fiscal foundation that made the leverage necessary in the first place. As Zhao’s team concludes, “short-term tools can only achieve risk mitigation; only by deepening fiscal-system reform and cultivating endogenous local fiscal and industrial capabilities can debt risk be fundamentally resolved.”