China has approved a 10 trillion yuan ($1.4 trillion) plan to bolster its ailing economy by allowing local governments to refinance their debts, unveiling additional stimulus measures to combat a potentially volatile growth path marked by an imminent return from Donald Trump to the White House.
Finance Minister Lan Fo’an said at a press conference on Friday (8) that the loan, capped at 6 trillion yuan ($838 billion), would be allowed over three years to help regional governments to replace their so-called “hidden debt”. This type of debt is typically owed by risky local government financing platforms backed by cities or provinces.
Lan added that local governments will have access to a separate quota of 4 trillion yuan ($558 billion) in the form of special local bonds over five years, also with the aim of reducing their debt holdings. The announcement was made at the end of a five-day meeting of China’s top legislative body, the Standing Committee of the National People’s Congress (NPC).
“Since the beginning of this year, affected by a variety of factors, central and local tax revenues have fallen short of expectations,” Lan said.
Refinancing local government debt reduces interest costs, which will free up resources for local governments to spend in other areas, said Mark Williams, chief Asia economist at Capital Economics. But the package represents only about 0.5% of current gross domestic product, spread over the five years of the plan.
“Clearly, this is not going to make any appreciable difference,” Williams wrote in a research note Friday. “Today’s fiscal announcement is another disappointment for those who expected substantial stimulus.”
Years of strict pandemic restrictions and a housing crisis have depleted local government coffers in China, leaving authorities across the country struggling with mountains of debt. Lack of money means governments have few resources to drive economic growth.
The problem has become so extreme in some places that cities can no longer provide basic services, and the risk of default is increasing.
Lan revealed that at the end of 2023, China had a massive hidden debt balance of 14.3 trillion yuan ($1.99 trillion). Authorities aim to reduce this figure to 2.3 trillion yuan ($320 billion) by 2028.
Meeting a growth goal
The scale of the debt swap, while considered disappointing by some, exceeded the expectations of Larry Hu, chief China economist at Macquarie Bank.
“It may be disappointing for those who expected the NPC meeting to approve a massive fiscal package. But the expectation is unrealistic, as the objective of the policy is to achieve the GDP growth target and reduce tail risks, not to significantly revive the economy,” he said.
Reviving the economy refers to measures designed to stimulate growth and combat deflation, which has become a persistent problem in China. These efforts would require much more aggressive policies, far beyond debt swaps.
China’s GDP grew just 4.6% in the three-month period from July to September, compared with the previous year. That was only slightly above the expectations of economists polled by Reuters, who predicted a 4.5% expansion.
Still, at this rate of growth, there is a risk that Beijing will not meet its target annual growth rate of around 5%. After a summer of discouraging economic news, China’s leader Xi Jinping finally decided to move forward with a much-needed stimulus package, focused mainly on monetary measures, in the last week of September.
Since then, economists have been hoping for additional stimulus measures of up to 10 trillion yuan ($1.4 trillion) to restore optimism in the world’s second-largest economy.
