BEIJING, Aug 11 — China will let local governments raise about 1 trillion yuan (US$140 billion) through bond sales to repay the debt of local-government financing vehicles (LGFVs) and other off-balance-sheet issuers, Bloomberg News reported on Friday.

Debt-laden municipalities represent a major risk to China’s economy and financial stability, economists say, after years of over-investment in infrastructure, plummeting returns from land sales and soaring Covid-19 costs.

The finance ministry has informed relevant authorities about the “refinancing bonds” programme, Bloomberg said, citing unnamed people with knowledge of the matter and adding that quotas have been set for each region.

The ministry did not immediately respond to a request for comment.

Chinese leaders last month pledged to unveil a “basket of measures” to tackle local debt risks, without announcing details, to help ease their debts, signalling worries over a potential chain of municipal debt defaults destabilising the financial sector.

Policy advisers and economists have said measures are likely to include debt swaps, loan rollovers and possible debt issuance by the central government to bail out some localities.

The reported new step would be small — 1 trillion yuan is just 1.5 per cent of the 66 trillion yuan (US$9.1 trillion) in total debt the International Monetary Fund estimate is held by LGFVs, which cities use to raise money for infrastructure projects.

LGFVs play a key role in those projects, a top growth driver for the world’s second-largest economy. But some analysts say they have become the “black holes” of the country’s financial system, with the surging debt loads and weak revenues beginning to alarm investors.

No LGFV in China has defaulted in the public markets, but delinquencies in the private market are increasing. Big state-owned banks have recently rolled over loans to LGFVs or lent more to them.

Local government debt rose to 92 trillion yuan, or 76 per cent of economic output last year from 62.2 per cent in 2019.

All provincial-level governments but Beijing, Shanghai, Guangdong and Tibet will be able to use the bonds to repay off-balance-sheet liabilities, or “hidden debt”, according to Bloomberg.

Authorities also identified “high-risk” provinces and cities — including Guizhou, Hunan, Jilin and Anhui provinces and Tianjin city -where more support will be provided — the report said.

Last month’s pledge on debt cleanup was more constructive, economists say, than the message in April, when Communist Party leaders led by President Xi Jinping demanded “strict control” of local debts.

The change suggests, Beijing has realised it needs to urgently throw cash at the problem, economists say. — Reuters