China unveils $1.8 trillion plan to pay down local government debt; more action likely in case of a trade war

SHENZHEN/BEIJING – Chinese officials on Nov. 8 unveiled the country’s biggest efforts in recent years to tackle local governments’ hidden debts, which have long been a drag on economic growth, but disappointed investors looking to a large fiscal stimulus package to immediately boost the tepid economy.

Beijing will roll out a 10 trillion yuan package (including $6 trillion newly approved) for local governments to move payment arrears off the books onto their balance sheets, senior officials including Finance Minister Lan Fo’an said at a news conference. briefing, as top lawmakers wrapped up a closely watched five-day meeting.

This measure does not amount to a direct fiscal stimulus – which Mr Lan indicated is in the works – but is instead aimed at defusing risks to the financial system, and giving local governments more breathing space who are short on cash.

Observers hoping to find out how much China would spend to revive its economy were left none the wiser.

Analysts noted, however, that Chinese officials may not have seen an immediate need for more stimulus, and could reserve policy flexibility for after U.S. President-elect Donald Trump, who started a tough trade war with China during his first term from 2017 to 2021. , will return to the White House in January 2025.

Chinese exports, a key driver of the Chinese economy, are at risk now that Trump has promised to impose tariffs of 60 percent or more on Chinese goods this time.

Mr Carlos Casanova, a senior Asia economist at Union Bancaire Privee in Hong Kong, said he expects Beijing to delay major measures until there is clarity on the Trump’s trade tariffs.

Local governments in China are responsible for the majority of government spending, but have faced pressure on budgets in recent years due to declining revenues and expensive debt repayments.

Of particular concern are their off-books debts – incurred through financing instruments – which pose risks to the financial system in the event of widespread defaults.

These payment arrears were estimated at 14.3 trillion yuan at the end of 2023, Mr Lan said. Other estimates are higher: the International Monetary Fund’s projection for the same period is about 60 trillion yuan.

Beijing’s debt swap package will allow local governments to convert 10 trillion yuan of hidden debt into bonds, which are cheaper to finance.

The National People’s Congress Standing Committee this week approved a 6 trillion yuan increase in local governments’ debt quotas, allowing them to issue an additional 2 trillion yuan in bonds every year between 2024 and 2026 to replace hidden loans.

Local governments will also be able to tap 4 trillion yuan of previously approved special bonds – 800 billion yuan per year from 2024 to 2028 – for the same purpose, Mr Lan said.

These measures, in addition to existing initiatives, aim to reduce hidden local debt to 2.3 trillion yuan by 2028, and would save officials 600 billion yuan in interest payments, he said.

Ms Erica Tay, director of macro research at Maybank Investment Banking Group, said the 6 trillion yuan figure was “substantial” – and higher than the 4.7 trillion yuan of debt swaps recorded over the past six years.

The swaps would significantly reduce local officials’ debt burdens, allowing them to direct limited resources to increased spending on essential services, which is “exactly what is needed to stimulate consumption,” she said.

But Ms Shan Guo, a partner at consultancy Hutong Research in Shanghai, said the figure was “quite disappointing”. It covered only a fraction of hidden arrears, had to be spread over three years and still required local governments to shoulder the debt burden themselves, she said.

At the press conference in Beijing, Mr Lan indicated that more budget support for the Chinese economy was on the way.

The government was “actively planning” next steps, he said, which would see the rollout of more supportive fiscal policies to achieve China’s economic targets by 2025.

These include using available space to widen deficits, expanding special bond issuance and increasing transfers from the central government to local governments, he added.