China unveiled a $1.4 trillion package of measures on Friday to address the urgent issue of local governments’ debt. Further economic measures are expected in 2019.
Lan Fo’an, Minister of Finance revealed the plan to utilize deficit space available to fund these efforts. He previously described this strategy as one that had significant potential in October.
CNBC’s translated version states that Lan’s comments came following a 5-day National People’s Congress Standing Committee session, during which a proposal was passed to increase the local government debt ceiling by 6 trillion additional yuan.
The annual budget for this five-year program will be approximately 2 trillion Yuan.
Lan has also announced a plan to issue local government bonds totaling four trillion yuan over five years.
The hidden debt of local governments is projected to fall from 14,3 trillion Yuan at the end 2023, to 2.3 trillion Yuan by 2028.
Lan said that this will reduce financial pressures on local authorities and free up resources for economic growth.
Investors’ response to this package was not uniform.
Investors had hoped that the iShares China Large Cap ETF (FXI), which tracks China’s largest companies, would see a more immediate fiscal stimulus.
Reuters quoted Huang Xuefeng as saying “I do not see anything beyond expectations.” Huang Xuefeng is the research director of Shanghai Anfang Private Fund Co. in Shanghai. It’s not huge when you consider the fiscal shortfalls.
The money used is to pay off hidden debts. This means that it does not create new workflows. Therefore, the growth support isn’t as direct.
China’s stimuli efforts since September
Since late September, China has increased its stimulus measures. This has triggered a rally in the stock markets.
During a September 26 meeting, President Xi Jinping called on the government to provide stronger fiscal and monetary assistance in order to stop the slump of real estate markets.
Although the People’s Bank of China already reduced interest rates, larger debts and government spending plans require approval from parliament.
According to the state-run media, in October last year, the deficit ceiling was raised to 3,8%, up from 3%. However, this meeting didn’t announce any similar adjustments.
Analysts predict that fiscal support will increase, particularly as President-elect Donald Trump adjusts his trade policy, having previously warned of increased tariffs against Chinese products.
China’s hidden debt
A real estate crash has led to a significant reduction in local government revenue, which is causing the local debt load to increase.
Budgets are also being squeezed by pandemic related expenses.
The International Monetary Fund released a report that showed local government debt at 22% GDP, surpassing the revenue growth rate by 2019.
Nomura estimated that China’s hidden local governments debt ranged from 50 trillion yuan to 60 trillion ($7 trillion to 8,4 trillion) with the potential for debt issuance increasing by 10 trillion yuan in the next few years, which could save local authorities as much as 300 billion yuan per year on interest.
This is a post about China’s “hidden” debt. Beijing announces $1.4 trillion plan for local governments to relieve funding strains
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