China is introducing new financial measures to address the risks posed by local government debt, with a particular focus on replacing the role of local government financing vehicles (LGFVs) with central government financing vehicles (CGFVs). This shift follows a history of using LGFVs to bypass borrowing limits and fund infrastructure projects, but their lack of transparency and low returns have raised concerns about financial instability.

The Chinese government has approved a 500 billion yuan ($68.5 billion) debt-raising initiative for two state-owned enterprises (SOEs)—China Reform Holdings and China Chengtong Holdings Group—marking the first time such debt has been authorized. This move is part of a broader strategy to give the central government a more significant fiscal role in supporting economic growth while local officials focus on managing their debt loads.

Economists view this as a long-anticipated change. LGFVs were crucial for driving China's growth during and after the global financial crisis, but they often resulted in hidden debt and less profitable investments. To address these issues, Beijing has also unveiled a 10 trillion yuan plan to convert off-the-books debt into more transparent obligations, though this still falls short of the estimated 60 trillion yuan in hidden debt.

The two SOEs involved in this initiative have lower financing costs than LGFVs, allowing them to invest more efficiently in key national projects, such as technological and strategic industries. They are also easier for the central government to oversee compared to the thousands of local LGFVs. Experts suggest these central SOEs may gradually replace LGFVs in managing public investments, though challenges remain, including the difficulty in generating enough profit to cover the resulting debt.

Overall, this new approach signals a shift in China's fiscal policy as the central government takes on a more active role in managing debt and stimulating economic growth, but it also raises questions about the long-term sustainability of these new financing structures.