In a bid to fortify its weakening economy, China has unveiled a comprehensive plan worth 10 trillion yuan ($1.4 trillion), granting local governments the ability to refinance their mounting debts. This strategic move aims to introduce additional stimulus measures to steer the country away from a potentially turbulent growth trajectory, particularly with global economic challenges and geopolitical tensions on the horizon.
Efforts to Stabilize a Faltering Economy
Over the past year, China, the world’s second-largest economy, has encountered significant hurdles. The nation is grappling with strong deflationary pressures, diminished demand, a property market crisis, and increasing financial burdens on local governments. The economic outlook remains uncertain, especially with the looming threat of tariffs exceeding 60% on all Chinese goods, as proposed by former U.S. President Donald Trump.
During a recent press conference, Finance Minister Lan Fo’an announced that borrowing, capped at 6 trillion yuan ($838 billion), would be permitted over a three-year period. This initiative aims to assist regional governments in replacing their “hidden debt,” which is typically associated with risky local government financing platforms supported by cities or provinces.
Additionally, local governments will gain access to a separate 4 trillion yuan ($558 billion) quota in the form of special local bonds over five years. This measure is intended to further alleviate their debt burdens. These announcements came after a five-day meeting of China’s top legislative body, the Standing Committee of the National People’s Congress (NPC).
Debt swaps are generally designed to repair damaged balance sheets and serve as growth stabilizers, rather than potent growth stimulants. Mark Williams, chief Asia economist at Capital Economics, indicated that the refinancing of local government debt could reduce interest costs, thus freeing up resources for local governments to allocate elsewhere. Nevertheless, the package represents merely about 0.5% of the current gross domestic product spread over the five-year plan.
But Will It Make Any Difference?
Despite the ambitious fiscal plan, doubts linger about its overall impact. “Clearly, that’s not going to make any appreciable difference,” remarked Williams. “Today’s fiscal announcement is another disappointment for those expecting substantial stimulus.”
Shehzadh Qazi, Managing Director of China Beige Book, echoed this sentiment, stating, “I don’t think this does anything to actually stimulate growth, not at least in a way that’s going to be meaningful for markets,” regarding China’s $1.4 trillion stimulus package.
What Led to Massive Debt?
Over the years, China’s stringent pandemic restrictions coupled with a real estate crisis have drained local government treasuries, leaving authorities with substantial debt across the nation. This financial strain has led to a severe shortage of resources necessary for kick-starting economic growth.
In some regions, the situation has become so dire that cities are now struggling to provide basic services, and the risk of defaults is on the rise. Local governments are continuously striving to find sustainable solutions to these financial challenges to prevent further economic deterioration.
Investor Expectations Unmet
Lan revealed that by the end of 2023, China had amassed a massive hidden debt balance of 14.3 trillion yuan ($1.99 trillion). The goal is to reduce this figure to 2.3 trillion yuan ($320 billion) by 2028.
“It may be disappointing for those who were expecting the NPC meeting to approve a massive fiscal package. But the expectation is unrealistic because the policy goal is to achieve the GDP growth target and reduce tail risks, not to reflate the economy in any meaningful way,” he stated.
Following a summer of bleak economic news, China’s leader Xi Jinping has finally decided to proceed with this much-needed stimulus package, focusing primarily on monetary measures. Since the announcement, economists have been anticipating additional actions from the government to aid in reviving the struggling economy.
