BEIJING: In a move to address mounting financial pressures on local governments and stabilize its flagging economy, China unveiled a 10 trillion yuan ($1.4 trillion) debt package on Friday. This new plan, which marks a shift from previous large-scale stimulus strategies, aims to ease local government financing strains and bolster long-term economic stability rather than provide immediate economic boosts.
Finance Minister Lan Foan confirmed the details of the package, which focuses on repairing municipal balance sheets over time, rather than directly injecting funds into the economy. The package includes measures to raise local governments’ debt quota by 6 trillion yuan over the next three years, specifically aimed at repaying hidden debts. Additionally, local governments were granted permission to use 4 trillion yuan in funds previously approved by Beijing for the same purpose, marking a long-term strategy to manage municipal debt.
These efforts come as China faces multiple economic challenges, including pressure from the re-election of Donald Trump as U.S. president. Trump’s potential re-imposition of high tariffs on Chinese goods has raised concerns in Beijing about trade disruptions and the risk of slowing growth. State media reported that China’s cabinet has also approved measures to expand export credit insurance and provide greater support for trade firms, signaling a proactive approach to shielding exporters from external pressures.
However, some analysts expressed disappointment, noting that the announced measures did not meet the high expectations of investors hoping for a large fiscal stimulus. Huang Xuefeng, research director at Shanghai Anfang Private Fund Co, pointed out that the focus on replacing hidden debt rather than directly stimulating economic activity means the measures might not immediately boost growth. “It’s not huge if you look at the fiscal shortfalls,” Huang said.
China’s local governments are under severe financial strain, having accumulated hidden debts through loans and bonds tied to local government financing vehicles (LGFVs), a common method for funding infrastructure and development projects. These governments have been further squeezed by a real estate crisis that has led to a sharp decline in revenues from land auctions, a key funding source.
The government hopes that swapping hidden debt for official debt will reduce interest costs by around 600 billion yuan over five years, but experts like Carlos Casanova, Senior Economist at UBP, believe the package falls short of what is needed to address China’s broader economic challenges. He estimated that a debt package closer to 23 trillion yuan would be required to both reduce unsold housing inventory and manage the mounting debts of local governments.
In addition to the internal financial strain, China’s economic outlook is further clouded by external pressures, particularly the potential return of tariffs under a Trump administration. Such measures could significantly impact Chinese exporters, reducing profits and deepening deflationary pressures in the economy, analysts warn.
Despite the scale of the announced debt package, many analysts remain cautious about its effectiveness in boosting economic growth in the short term. The overall sentiment is one of disappointment, as China navigates a complex landscape of internal debt challenges and external trade tensions.
