China Unveils $1.4 Trillion Plan to Bail Out Local Governments
In a major policy move, China has announced a $1.4 trillion plan to help local governments tackle their hidden debt and stimulate economic growth. The package includes measures such as issuing special bonds to swap out high-interest debts, raising the debt ceiling for local authorities, and setting aside resources to boost investment and consumption.
Background
China’s policymakers have been working to address the country’s slowing economy, which has raised concerns about its ability to meet the annual expansion target of around 5%. In recent months, Beijing has unleashed a series of stimulus measures, including cuts in interest rates and reserve requirements for banks. However, investors have been looking for more concrete steps to boost domestic demand.
Key Components of the Plan
- Special Bonds: Local governments will be allowed to issue six trillion yuan ($860 billion) in special bonds over three years to swap out hidden debt.
- Debt Ceiling Raise: The government has raised the debt ceiling for local authorities, allowing them to tap another total of 4 trillion yuan ($570 billion) in special local bond quota over five years.
- Resource Allocation: Resources will be set aside to boost investment and consumption, with an estimated savings of around 600 billion yuan ($86 billion) in interest payments over five years.
Market Reaction
While markets have welcomed the measures, some investors remain skeptical about their effectiveness. Analysts argue that a more direct and immediate impact on economic growth can be achieved through fiscal stimulus to bolster consumption.
Expert Views
- "The debt swap program alone cannot support growth," said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd. "China needs a wholesale reform of the fiscal and tax system to support the financial sustainability of local governments."
- "To really have a positive impact on markets, you want to see something which is 2 trillion or above specifically talking about consumption-related stimulus," said Bernie Ahkong, CIO at UBS O’Connor Global Multi Strategy Alpha.
Next Steps
Investors will be looking for further measures to stimulate the economy in December, when the 24-man Politburo will discuss the economy and policymakers will huddle at the annual Central Economic Work Conference. By then, officials could have greater clarity on Trump’s stance on tariffs.
Timeline
- 2023: Outstanding hidden debt was 14.3 trillion yuan as of the end of the year.
- 2024-2026: Local governments can issue six trillion yuan in special bonds to swap out hidden debt.
- 2029: An additional two trillion yuan in hidden debt related to the redevelopment of rundown homes will come due.
Conclusion
China’s $1.4 trillion plan is a significant step towards addressing its economic challenges, but more needs to be done to boost domestic demand and stimulate growth. Investors will continue to monitor developments and look for further measures to support the economy.
