Baoji Leads China in Early Repayment of Special Bonds

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China has expanded its initiative to ease local fiscal burdens by encouraging eligible governments to repay debts early, moving beyond provinces to include prefecture-level cities. Baoji in Shaanxi became the first city to successfully carry out early repayment of special bonds. This development highlights how local authorities are exploring market-based strategies to lower financing costs and better manage their debt risks.

Baoji repaid two special bonds totaling CNY85 million (approximately USD12.4 million). These bonds were issued in 2022 and 2023, with interest rates around 3.3%, originally due to mature in 2042 and 2043. The original repayment plan involved a lump sum payment at maturity, with funds allocated for upgrading a major wastewater treatment facility.

The early debt repayment was executed through an open bidding process, with the redemption price set at CNY97.6 million. This move resulted in a reduction of interest expenses by CNY33.2 million. The repayment was financed solely through proceeds from the early sale of related project assets, which not only revitalized existing assets but also helped cut debt servicing costs.

This market-driven approach serves as a potential model for other local governments contemplating early debt repayment. An expert from a leading financial university noted that Baoji’s decision to leverage proceeds from asset disposals to reduce debt can help alleviate financial pressures, free up resources for development, and mitigate future debt risks.

In 2020, China’s finance authorities introduced regulations allowing local governments to make early principal repayments under certain conditions, provided the rights of creditors are safeguarded. Prior to Baoji, only Beijing and the Shaanxi provincial government had undertaken similar early repayments.

Since 2023, Beijing has executed three early repayments, amounting to approximately CNY5.2 billion (around USD761.1 million) in special-bond principal. Shaanxi also prepaid CNY90 million of its bonds last September, resulting in savings of roughly CNY6.5 million (about USD952,410) in interest payments.

Typically, holders of government bonds include banks and other financial institutions. Early repayment allows these investors to realize returns sooner and reallocate capital into other assets, enhancing overall efficiency.

As of late February, China’s local government debt totaled around CNY56.6 trillion (approximately USD8.3 trillion), with an average remaining maturity of 10.6 years and an average interest rate of about 2.81%, according to official data.