The approach to addressing economic risks is shifting from a traditional singular "bomb disposal" path to a hybrid strategy combining "stock resolution" and "model creation."
This year's Government Work Report focuses on three key areas—real estate, local government debt, and non-performing assets at financial institutions—proposing systematic, long-term, standardized, and institutionalized policy arrangements for risk prevention and control.
Top-level design for handling economic risks is transitioning from the conventional single-path "bomb disposal" method to a mixed approach of "resolving existing risks" and "establishing new models," moving from emergency surgical interventions towards building a medium- to long-term institutional foundation for economic security.
Real Estate Risk Control: Building a New Model for Stable Development Domestic housing prices have fallen approximately 20% from their peak levels. In response, the report proposes a systematic approach of "city-specific policies to control new supply, reduce inventory, and optimize supply." The policy direction is more targeted and actionable, indicating a shift in real estate regulation from purely "preventing risks" to "balancing risk prevention with promoting development," with the aim of establishing a new model for real estate development.
"Controlling new supply" means rationally managing the supply of new commercial housing from the source to avoid creating additional inventory and prevent further exacerbation of supply-demand imbalances. To prevent new debt default risks during expansion, the report emphasizes further utilizing the "white list" system for ensuring housing project delivery.
"Reducing inventory" directly addresses the primary issue of excessive existing commercial housing stock. While proposing various channels to revitalize existing resources, it also suggests "encouraging the acquisition of existing commercial housing primarily for affordable housing," thereby connecting the commercial housing market with the affordable housing system. This could potentially yield dual benefits of stabilizing the market and preventing risks.
Compared to "controlling new supply" and "reducing inventory," "optimizing supply" is more promising. With a long-term development perspective, the report explicitly calls for "orderly promoting the construction of safe, comfortable, green, and smart 'good housing,' implementing housing quality improvement projects and property service quality enhancement initiatives." This signifies a shift in supply structure from homogeneous expansion to quality-oriented adaptation, paying full attention to regional demand differences, particularly addressing core user needs such as age-friendly design and high comfort, to achieve supply-demand matching. Accordingly, real estate enterprises need to advance technological research, refined construction, and community operations to build a high-quality, sustainable development model.
The report's provisions—from "strengthening housing security for first-marriage, first-child families and supporting housing improvement needs for multi-child families," to reiterating "high-quality urban renewal and steady implementation of old residential area and urban village renovations," to first-time emphasis on "optimizing affordable housing supply," and defining the "good housing" construction goal—not only demonstrate the policy主线 of revitalizing existing stock and optimizing new supply but also reflect a focus on benefiting people's livelihoods and promoting fairness within real estate risk control, alongside the intent to create corresponding safeguards and implementation mechanisms.
Local Government Debt Risk Resolution: Creating a New Long-Term Operational Mechanism According to the latest Ministry of Finance data, local government bond issuance nationwide totaled approximately 10.31 trillion yuan in 2025, setting a new annual record and marking the first time annual issuance exceeded 10 trillion yuan. In terms of outstanding debt, the balance of local government debt reached about 54.82 trillion yuan by the end of December 2025, an increase of roughly 15% from the previous year. To address hidden local government debt risks, the central government initiated a 10 trillion yuan hidden debt swap plan in 2024. From 2024 to 2026, 2.8 trillion yuan in local government refinancing bonds will be issued annually to swap existing hidden debt, extending maturities and lowering interest rates to mitigate local debt risks. Overall, approximately 87% of maturing local government bond principal is currently being refinanced by local governments through new borrowing. It is evident that the essence of this debt resolution round is converting local governments' off-balance-sheet hidden debt into on-balance-sheet explicit debt, and transforming high-interest, short-term debt into low-interest, long-term debt.
The implementation of a package of technical debt resolution policies relying on "time for space" and "low interest for high interest" has not only repaired local government balance sheets and significantly alleviated recent peak debt repayment pressure, effectively containing systemic risks, particularly liquidity risks, but also helped local governments transition away from a "firefighter" role, freeing up precious fiscal resources for safeguarding livelihoods and promoting development.
However, as the debtors, local governments still face repayment pressure. Their fiscal conditions, especially expenditure capacity, have not improved significantly, and their ability to generate incremental repayment capacity through self-sustaining means remains weak. Therefore, as indicated by the report, the next policy focus must shift from "debt resolution" itself to "activating local vitality," and from "high-risk accumulation" to "high-level governance."
First, the report proposes "optimizing debt monitoring and assessment indicators and building a unified long-term mechanism for government debt management." This signifies that local debt governance is evolving from simply resolving existing debt to balancing resolution with preventing new accumulation, combining transformation promotion with long-term supervision. To this end, the report outlines strongly oriented policy measures, including accelerating the resolution of hidden debt risks, strictly preventing fake debt resolution, firmly establishing the containment of new违规 hidden debt as an iron discipline, and promoting the implementation of "master account" management for general bonds, special bonds, urban investment bonds, and arrears. It also calls for increased financial and fiscal support and optimized debt restructuring and swap methods.
Second, supporting local governments to fully utilize supportive policies. The ultimate goal of debt resolution is not to make governments "hesitant" but to allow them to "advance unencumbered." The report emphasizes that the 4.4 trillion yuan in local government special bonds planned for 2026 must be precisely directed towards projects that can generate sustained cash flow and stimulate effective demand, avoiding idle funds. Additionally, local governments should effectively revitalize existing assets through financial instruments like asset securitization and REITs, converting stagnant infrastructure such as roads and water utilities into tradable financial products.
Third, as a key part of debt resolution, the report explicitly states for the first time the need to "employ multiple measures to resolve operational debt risks of local government financing platforms." Local Government Financing Vehicles (LGFVs) are the main entities for local government indirect financing and hidden debt. Since 2023, they have been exiting in batches according to policy, with all LGFVs required to be cleared and completely stripped of their government investment and financing functions by June 2027. However, some platforms have only formally announced their exit without fundamental changes to their governance structure, business models, or dependence on the government. Based on the clearance principle of "strict supervision and substance over form," the real transformation of LGFVs should be "thorough," achieved through mergers and acquisitions, injection of operational assets, or even liquidation, turning them into genuine market entities. There is also a need for high vigilance against some state-owned enterprises morphing into new financing platforms after transformation, creating new risk exposures.
Finally, further rationalizing the fiscal responsibilities and powers between central and local governments is a key link in debt resolution emphasized by the report. Given the current debt resolution path heavily reliant on central government leveraging and local asset monetization, local governments undoubtedly bear expenditure responsibilities exceeding their fiscal capacity. Without rationalizing the relationship between fiscal power and administrative authority at the institutional level, it will be difficult to fundamentally curb the impulse for local hidden borrowing. In this regard, the report stresses "making the non-accumulation of new hidden debt an iron discipline" to prevent falling into the vicious cycle of "resolving debt while accumulating new debt." Furthermore, the fundamental solution lies in appropriately strengthening central government responsibilities and increasing the proportion of central fiscal expenditure. Only by accelerating fiscal and tax system reform and reshaping central-local fiscal relations can local governments break free from their reliance on land finance and hidden debt, allowing local debt to truly return to its original role as an "economic booster." This is not just a fiscal breakthrough but a necessary path towards modernization of governance.
Non-Performing Assets at Small and Medium Financial Institutions: New Resources and Means for Disposal Affected by slowing economic growth, particularly adjustments in the real estate market, the asset quality of some small and medium financial institutions is under pressure. Effectively disposing of non-performing assets and resolving existing risks is crucial not only for the survival and development of the institutions themselves but also for regional financial stability and economic security. The report calls for "prudently disposing of financial institutions' non-performing assets" and "strengthening financial risk monitoring, early warning, and prompt corrective action to enhance risk prevention capabilities at the source." These statements signal a transition from "active prevention" to "prudent resolution," moving intervention forward from post-event disposal to early correction.
"Adhering to market and rule-of-law principles, and orderly advancing the disposal of high-risk institutions" is the classified approach established by the report for handling NPLs at small and medium financial institutions. The basic orientation is to avoid complete reliance on administrative bailouts while also preventing unchecked risk contagion, instead fully leveraging market mechanisms within a legal framework. Specifically, for high-risk but salvageable institutions, measures like mergers and acquisitions, provincial-level consolidation, or entrustment to high-quality institutions for management can be adopted. For insolvent institutions without rescue value, orderly exit should be achieved through deposit insurance fund takeovers, market-based acquisitions, or bankruptcy liquidation. This "one-bank-one-policy" approach avoids simplistic "one-size-fits-all" treatment and reflects the reform direction of market-based exit.
Broadening NPL disposal channels helps reduce the NPL ratio of small and medium institutions more quickly. The report emphasizes "augmenting resources and means for risk disposal of local small and medium financial institutions." On one hand, practice has proven that bulk transfer of NPLs to Asset Management Companies (AMCs) is an effective method. Although this may involve discount costs for the institutions, it clears out assets with high economic capital consumption and poor liquidity, thereby improving asset quality and saving capital tied up in poor-quality assets. On the other hand, methods like asset securitization and debt-to-equity swaps are worth exploring and promoting. Securitizing NPLs can introduce broader market investors to share risks, while debt-to-equity swaps for promising but temporarily troubled enterprises can achieve win-win outcomes for banks and firms.
Capital is the "ballast" for financial institutions to absorb losses and withstand risks. However, small and medium financial institutions face a dual dilemma in capital replenishment: weak internal capital accumulation capacity due to declining profitability limits the space for retained earnings to supplement capital, and obstructed external capital replenishment channels like IPO financing and capital increases are constrained by market conditions and shareholder strength. Addressing this, the report explicitly calls for "increasing capital replenishment through multiple channels." On one hand, issuing special bonds is an important policy tool. Typically issued by local governments, these bonds replenish capital for small and medium banks by subscribing to convertible agreement deposits or through direct capital injections. The report advocates for "normalizing the issuance of special bonds for local small and medium banks." On the other hand, actively utilizing market-based capital instruments, including expanding the scale of perpetual bonds and tier-2 capital bonds, as well as capital increases and introducing strategic investors. Compared to special bonds, these market-based tools focus more on investor diversification, helping to attract long-term funds from sources like social security funds and insurance companies. Particularly for high-risk institutions, introducing quality shareholders can both replenish capital and improve corporate governance, achieving "capital introduction" and "expertise introduction" simultaneously.
While disposing of existing risks, it is even more crucial to prevent and curb incremental risks and build a long-term mechanism that addresses root causes. The report proposes "strengthening financial regulatory coordination," with central-local regulatory coordination becoming a key direction and link. Currently, local governments primarily bear the responsibility for disposing of risks at local small and medium financial institutions within their jurisdictions, while regulatory authorities are responsible for professional supervision and rule-making. In the future, a long-term coordination mechanism of "central planning, local leadership, and market participation" needs to be established.
Beyond further consolidating local responsibility, it is essential to unify the regulatory framework, achieving linkage between central and local daily supervision, risk early warning, and enforcement actions. This would break down regulatory blind spots caused by poor information flow, enabling information sharing, data interoperability, joint inspections, collaborative enforcement, proactive consultation and unified standards before policy formulation, and shared responsibility in joint risk disposal, eliminating the dissipative pattern of fragmented oversight. At the resource level, the scale of the deposit insurance fund and the financial stability保障 fund can be further increased. At the operational level, consideration can be given to granting deposit insurance agencies stronger preemptive intervention rights and further improving judicial bankruptcy procedures for financial institutions, providing comprehensive support for local governments in disposing of NPLs at small and medium financial institutions.