China has unveiled an ambitious plan to ease public debt, aiming to move local governments away from austerity that has led to a domestic crisis.

Policymakers meeting in Beijing last week approved a proposal to swap six trillion yuan ($840 billion) of hidden debt held by local governments for official loans on more favorable terms.

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Hidden debts are defined as debt for which a government is responsible but is not disclosed to its citizens or other creditors.

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Here are some key points behind China’s massive debt shake-up:

Where is the debt stored?

Most of the hidden debt of local governments over the last two decades was accumulated through state-owned companies known as local government financing vehicles (LGFVs).

While state and territorial governments faced restrictions on their own borrowing, LGFVs were less regulated and were used to take out loans and issue bonds to finance infrastructure projects.

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However, today local governments are running out of infrastructure needs; This means newer projects like extra bridges and conference centers tend to make less money because there is so little demand for them.

LGFVs are at risk of default as the national real estate market collapses, hurting the government’s land sale proceeds.

According to the International Monetary Fund, China’s local governments had an estimated 60.4 trillion yuan ($8.4 trillion) in debt hidden in LGFVs by 2023.

Why is hidden debt important?

Debt-burdened local governments have turned to cost-saving measures in recent years, such as cutting civil servant salaries and pensions, suspending transportation services and aggressively collecting fines and fees from businesses.

Local governments in Guangxi, Shaanxi and Sichuan regions have seen a significant increase in fines collected in the first half of 2022, according to Chinese financial publication Caixin.

The central government in Beijing this year warned locals not to generate income through fines after a county in northern Hebei province was found to have forged signatures on nearly 2,000 traffic violation tickets in January.

While small amounts of money undermined business and consumer confidence, local government creditors and infrastructure contractors were not paid.

What is China doing to fix this?

The debt swap plan announced Friday would raise the local government debt ceiling every year from 2024 to 2026 and include a total of $558 billion in hidden debt that could be swapped.

Meanwhile, Finance Minister Lan Fo’an told reporters on Friday that “$112 billion in new local government special bonds will be issued every year for five consecutive years to support the government’s financial resources.”

The scale of the plan exceeded expectations, but analysts at Goldman Sachs warned on Friday that its impact would be small unless “the majority of revenues are used to pay down corporate debt and pay overdue civil servants’ salaries.”

Used correctly, the new measures could “free up financial resources and allow local governments to operate more normally,” Societe Generale analysts wrote.

This isn’t the first time China’s central government has tried to rein in domestic debt.

In 2015, Beijing introduced a loan-for-bond program that encouraged local governments to exchange loans for low-interest bonds.

This was followed over the years by a series of debt-fighting measures, including certain bonds aimed at helping refinance existing projects.

The new debt plan is part of a series of policies announced by authorities since September, all aimed at rescuing the country from a protracted crisis.

Beijing has eased home-buying restrictions and lowered interest rates to stimulate economic activity, but analysts have called for further stimulus measures.