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China unveils .8 trillion plan to settle local public debt; more action likely in case of trade war
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China unveils $1.8 trillion plan to settle local public debt; more action likely in case of trade war

SHENZHEN/BEIJING – Chinese authorities on November 8 unveiled the country’s biggest effort in recent years to address hidden local government debt, a long-standing drag on economic growth, but disappointed investors looking for ‘a vast fiscal stimulus plan to directly stimulate the lukewarm economy.

Beijing will roll out a 10 trillion yuan (S$1.8 trillion) plan – including 6 trillion newly approved – to allow local governments to clear off-balance sheet arrears on their balance sheets, said senior officials including the Minister of Finance Lan Fo’an, during a press conference. briefing, as top lawmakers wrapped up a closely watched five-day meeting.

The measure does not constitute a direct fiscal stimulus – which Mr Lan indicated was in the works – but rather aims to defuse risks to the financial system and give more breathing room to cash-strapped local governments.

Observers hoping to know how much China would spend to revive its economy were not informed.

Analysts noted, however, that Chinese officials may not have seen an immediate need for additional stimulus measures and may reserve some policy flexibility after US President-elect Donald Trump, who during his first term, 2017 to 2021, sparked a deadly trade war with China. , returns to the White House in January 2025.

Chinese exports, a key driver of its economy, are in danger as Trump has this time pledged to impose tariffs of 60% or more on Chinese goods.

Mr Carlos Casanova, senior Asia economist at Union Bancaire Privée in Hong Kong, said he expects Beijing to delay any significant action until there is clarity on the situation. Trump’s trade tariffs.

In China, local governments are responsible for most public spending, but their budgets have been cut in recent years due to falling revenues and costly debt repayments.

Their unofficial debt – incurred through financing vehicles – is of particular concern, as it poses risks to the financial system in the event of widespread defaults.

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

Through Beijing’s debt swap program, local governments will be able to convert 10 trillion yuan of hidden debt into bonds, which are cheaper to finance.

The standing committee of the National People’s Congress, or legislature, this week approved a 6 trillion yuan increase in local governments’ debt quotas, allowing them to issue an additional 2 trillion yuan in bonds each year from 2024 to 2026 to replace hidden loans.

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

The measures, alongside existing initiatives, aim to reduce hidden local debt to 2.3 trillion yuan by 2028, and would save authorities 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 in debt swaps recorded over the past six years.

These swaps would significantly reduce the debt service burden on local officials, allowing them to direct their limited resources toward higher spending on essential services, which is “precisely what is needed to boost consumption,” it said. she declared.

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

At the press conference in Beijing, Lan signaled that more fiscal support for China’s economy was underway.

The government is “actively planning” the next steps, he said, with the implementation of more favorable fiscal policies to achieve China’s economic goals in 2025.

These include using the available margin to increase deficits, expanding the issuance of special bonds and increasing transfers from the central government to localities, he added.