So far in 2023, the foundations of China's economic recovery are not yet solid, with a triple-front assault from supply fluctuation, demand contraction and weakening expectations still evident.

To ensure steady overall economic recovery, the Central Economic Work Conference in mid-December has proposed that "proactive fiscal policies should be intensified with efficiency being improved". It noted the importance of improving fiscal policy effectiveness, maintaining necessary fiscal expenditure intensity and optimizing the policy mix of deficits, special local government bonds, interest discounts and other tools. Based on such a backdrop and policy stance, we expect a steady increase in the amount of special local government bonds this year.

The conference also emphasized that it is necessary to prevent and resolve risks from local government debt, curb increases in such debt and guard against risks. Ministry of Finance also stated on Jan 6 that the principle of "no bailouts from the central government" will be strictly adhered to. Efforts will be made to promote the market-oriented transformation of financing platform companies by category.

General expectations that repayments of debt at the local government level are guaranteed as the central government will step in with bailouts in worst-case scenarios should be categorically dispelled. Efforts will be made to advance the market-based transformation of all local government financing vehicles in a category-based manner, to draw a clear distinction between government and enterprises, and push sustainable fiscal development.

Based on such statements, we expect that strict supervision over hidden debt will continue, and debt risk disposal and urban investment transformation will continue to advance.

On the special local government debt front, subsequent fiscal policy support will be enhanced with effectiveness being improved so as to increase the efficiency of the use of these funds and prevent redemption hazards.

First, the newly increased quota for special local government bonds is likely to remain high. This year, the government still faces significant pressure in stabilizing growth. Amid pressure to keep budgets in order, the infrastructure sector still maintains a large funding gap. Therefore, it is unlikely that the amount of newly increased special local government bonds used for project construction will drop significantly. We expect this year's quota for special local government bonds to stand at around 3.8 trillion yuan ($552.61 billion), and the balance of the special-purpose bond quota can be utilized when necessary.

Second, the normalized management of special local government bonds should be refined and thoroughly implemented.

Refinement and implementation of the normalized management over special local government bonds are necessary, especially strengthening effective project reserves. While the problem of "funds released from these bonds awaiting qualified projects" remains acute, we expect that policies will be issued at regional or provincial levels to enhance the number of projects suitable for special bond funding and support.

The usage of funds released from such bonds will also be carefully adjusted and the mechanism for approved projects will be set up accordingly. Thus, the transfer efficiency from "bond to asset" will be improved to ensure that policies keeping economic growth stable generate results and returns.

In January, the Ministry of Finance made it clear that China is ready to deal with hidden outstanding local government debt in a law-based, market-oriented manner without reflexively resorting to central government bailouts.

The ministry said it will introduce a mechanism to handle debt defaults in a market-oriented and law-based manner to properly defuse any potential financial risks at the local government level. Any debt risks will be fairly shared among debtors and creditors.

Debt defaults will be addressed in a category-specific manner. Irregularities in government investment funds, public-private partnerships and government procurement services will be rectified.

From the perspective of the city investment sector, financing will still be tight. Financing policy will continue to favor enterprises engaged in key projects, and better ensure financing needs for those participating in modern urbanization undertakings, affordable housing, new infrastructure and green growth. Local governments will also enhance strict management of urban investment businesses by standardizing their financing and enforcing timely information disclosure. At the same time, we expect that local governments and financial institutions enhance cooperation and work better in sync to help urban investment businesses resolve debts and realize their transformation in a steady fashion. The government can also incentivize and guide these businesses toward market-oriented transformation with locally tailored measures, and enhance industrial policy and financing support for them in the process.

The writer is a key member of the China Macroeconomy Forum, and deputy director of research at credit ratings agency CCXI.

The views don't necessarily reflect those of China Daily.