China gave indebted local governments a 10 trillion yuan (US$1.4 trillion or $1.86 trillion) lifeline but stopped short of unleashing new stimulus, preserving room to respond to a potential trade war when Donald Trump takes office next year.
Officials unveiled details of a program to refinance “hidden” local debt onto public balance sheets at a press briefing in Beijing on Friday. Funds for that program — telegraphed last month but without a price tag or timeframe — will be provided through 2028, they said, after the move was authorised by the nation’s top lawmaking body.
While policymakers didn’t announce measures to directly stimulate domestic demand, Finance Minister Lan Fo’an promised “more forceful” fiscal policy next year, signalling bolder steps could come after Trump’s inauguration in January. The US president-elect has threatened 60% tariffs on Chinese goods that could decimate trade between the world’s largest economies, and blight exports that have been a rare bright spot for the Asian nation this year.
“Policymakers probably saw no need for a robust response to Trump’s victory before he takes office, given the relatively restrained post-election market response,” said Duncan Wrigley, chief China economist with Pantheon Macroeconomics. “Next year is a different matter, but officials will take that as it comes.”
China’s boldest stimulus blitz since the pandemic has sent onshore shares soaring by about 30% since September, taking the pressure off officials to act immediately. Those rate cuts, along with stock and housing market support pledges, have put President Xi Jinping back on track to hit this year’s growth goal of around 5%, without taking on piles of extra debt to reflate the economy.
Investors had waited for weeks for the fiscal side of that campaign, with media reports stoking expectations for more spending to stabilize the property market and boost consumption. Disappointment was palpable at the start of the presser, with the offshore yuan weakening as much as 0.6% before paring the decline to 0.3% as the full scale of the package was known.
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What Bloomberg Economics Says ...
Local debt resolution is a critical aspect of policy support. But it’s only part of a broader push that’s required to revive the economy. With this package, local officials may be able to start catching up on spending allocated in this year’s budget. To boost growth in a more sustainable way, other important aspects are likely to come, particularly more specific fiscal measures to support demand.— Chang Shu, Eric Zhu, economists
China’s top leader has labelled local government debt one of the three “major economic and financial risks” facing his country, as regions divert money away from growth-boosting projects to repay their debt. Most of that money is tied to entities known as local government financing vehicles, which borrow on behalf of provinces and cities to finance investment in infrastructure.
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But local authorities have struggled to service those liabilities in recent years as the property crisis wiped out land sales they relied on for revenue. Officials at the briefing said the outstanding value of so-called hidden debt was 14.3 trillion yuan as of the end of 2023, far short of the International Monetary Fund’s estimate of at about 60 trillion yuan.
While markets shrugged off the measures, Lan called the package “a major policy decision taking into consideration international and domestic development environments.” Policymakers also took the rare step of raising local governments’ debt ceiling mid-year for the first time since 2015.
That increase in the debt limit will allow local governments to issue six trillion yuan in additional special bonds over three years to swap hidden debt, Lan said at the briefing. Regional authorities will be able to tap another total of 4 trillion yuan in special local bond quota to be approved in tranches over five years — including 2024 — for the same purpose, he added.
“To really have a positive for markets, you want to see something which is two trillion or above specifically talking about consumption-related stimulus,” Bernie Ahkong, CIO at UBS O’Connor Global Multi Strategy Alpha told Bloomberg TV.
Investors will now be looking to December for the next major window for bigger fiscal measures, when the 24-man Politburo will discuss the economy at a monthly meeting and policymakers will huddle at the annual Central Economic Work Conference. By then, officials could have greater clarity on Trump’s stance on tariffs, and more time to devise a fiscal strategy to fireproof the economy.
Officials could still unveil a “meaningful” fiscal package in the near term, according to Xiaojia Zhi, head of research at Credit Agricole CIB. Additional spending of 12 to 13 trillion yuan is possible in the next three years, to offset the impact from aggressive US tariff hikes, she added.
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Explaining the impact of the package, Lan estimated the swap could save around 600 billion yuan in interest payments over five years, which would allow resources to boost investment and consumption. Another 2 trillion yuan in hidden debt related to the redevelopment of rundown homes will not come due until 2029, he said. That takes some pressure off local governments in the near future.
The push to cut hidden debt accumulated by local governments has been hailed by Morgan Stanley economists as a “critical” step in breaking a deflationary spiral and “equally important” to direct demand stimulus. Other analysts have argued that fiscal stimulus to bolster consumption would have a more direct and immediate impact on economic growth.
“From the fiscal management perspective, this is the right thing to do. But for the people concerned about the growth momentum of the economy, this will not address that in a significant way,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd.
“I’m not saying this isn’t positive for growth,” he added, “but the impact would be pretty indirect and spread across many years.”
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