China has unveiled an ambitious plan to relieve public debt, aiming to turn local governments away from belt-tightening practices that have exacerbated a domestic downturn.

Policymakers gathered in Beijing this past week approved a proposal to swap six trillion yuan ($840 billion) of hidden debt belonging to local governments for official loans with more favorable terms.

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

Here are some of the key points behind China's massive debt shakeup:

Much of local governments' hidden debt in the past two decades was accumulated through state-owned companies known as local government financing vehicles (LGFVs).

While the provincial and regional authorities themselves faced restraints on their own borrowing, LGFVs were less regulated and used for taking out loans and issuing bonds in order to finance infrastructure projects.

But local governments today are running out of infrastructure needs to meet, which means that newer projects, like extra bridges and conference centers, tend to make less money back as there is little demand for them.

And with the national real estate market crashing and hurting government land-sale revenues, LGFVs risk defaulting.

China's local governments had an estimated 60.4 trillion yuan ($8.4 trillion) of debt hidden in LGFVs as of 2023, according to the International Monetary Fund.

Why does hidden debt matter?

Burdened by debt, local authorities have in recent years turned to cost-saving measures like cutting civil servant salaries and pensions, suspending transport services and aggressively collecting fines and fees from businesses.

According to the Chinese financial publication Caixin, local governments in the Guangxi, Shaanxi and Sichuan regions saw a significant increase in fines collected in the first half of 2022.

And the central government in Beijing this year warned localities not to raise revenue through fines, after a county in northern Hebei province was found in January to have forged signatures on nearly 2,000 traffic violation tickets.

The penny-pinching has hurt business and consumer confidence, while local government creditors and infrastructure contractors remain unpaid.

What is China doing to fix this?

The debt swap plan announced Friday will raise the local government debt ceiling every year from 2024 to 2026, with a total of $558 billion of hidden debt that can be replaced.

Meanwhile, $112 billion "will be arranged from new local government special bonds every year for five consecutive years to supplement government financial resources", Finance Minister Lan Fo'an told reporters on Friday.

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 the proceeds are used to pay corporate arrears and delayed civil servant salaries".

If used correctly, the new measures could "free up fiscal resources and allow local governments to function more normally", Societe Generale analysts wrote.

This is not the first time China's central government has tried to rein in local debt.

In 2015, Beijing rolled out a debt-for-bonds program that encouraged local governments to exchange loans for lower-interest bonds.

This was followed over the years by a slew of debt-tackling measures including specific bonds intended to help refinance existing projects.

The new debt plan is part of a raft of policies unveiled by officials since September, all aimed at lifting the country from a prolonged downturn.

Beijing has eased home purchasing restrictions and cut interest rates to boost economic activity, but analysts have called for more detailed stimulus measures.