China said it will launch a massive fiscal intervention meant to help its local governments overcome mounting debt burdens. The Chinese government revealed on Friday a five-year program to help 10 trillion yuan ($1.4 trillion), its boldest move so far in addressing the so-called hidden debt issues that have been piling up across local authorities. This package is planned to run until the end of 2026, involving debt swaps and new issues of bonds, the benefits of which are meant to mitigate the current financial burden on regional governments.

Speaking to reporters, Finance Minister Lan Fo’an said the program would begin this year, when local governments would enjoy the annual debt swap of about 2 trillion yuan. That will be added to an annual issuance of 800 billion yuan in special local government bonds that sums up to 4 trillion over the life of the program. This is aimed at reducing the hidden debt of local governments-a type of off-balance-sheet liability that has been estimated at 14.3 trillion yuan as of 2023’s end. According to Lan, new measures could help reduce it to 2.3 trillion yuan by 2028.

Debt relief forms part of the broader strategy to revitalize the Chinese economy. Over the past few years, local governments have faced burgeoning fiscal problems mainly due to a slowdown in the real estate sector, the financial burden of having to incur the cost of the pandemic, and more locally unpayable debt issues that have mushroomed into becoming unsustainable debt of over 20% of China’s GDP according to the International Monetary Fund. The debt swap program is supposed to help release some of this pressure and free up funds for growth initiatives.

Some analysts see this as an important step in debt swapping, while others say there was no more fiscal support. Stock markets were also averse to the measure as most major indices fall following the announcement. Further fiscal and monetary stimulus measures are required, especially with such given challenges as slow export growth and domestic constraints on the economy.

While several of these concerns are valid, new measures of debt resolution are an essential turning point for official economic policy. With expectations that more stimulus could be in the offing in the near term, resolving local government debt will continue to be an important priority for policymakers as China continues to grapple with its complex economic conditions.