China has rolled out a 10 trillion yuan ($1.4 trillion) debt package aimed at easing local government financing issues and boosting the economy, which is facing significant challenges. The country's Finance Minister, Lan Foan, announced that additional stimulus measures are on the horizon, but analysts suggest that Beijing may hold off on major fiscal actions until U.S. President-elect Donald Trump's administration begins in January.
Local governments in China are under financial strain, dealing with high debt levels and declining revenues. To address these issues, many have resorted to cutting civil servant pay and accumulating debts with private companies, which has restricted cash flow and contributed to deflationary pressures. These challenges have been exacerbated by a prolonged property crisis since 2021, which led to a drop in revenue from residential land auctions—an important funding source for local governments.
The package unveiled by the Chinese government includes raising the debt quota for local governments by 6 trillion yuan over the next three years. This will help to pay off "hidden debts," a term used by Beijing for loans, bonds, and other forms of borrowing by local government financing vehicles (LGFVs). In addition, municipalities have been authorized to access another 4 trillion yuan over five years, funds that had already been approved by the central government for this purpose.
At the end of 2023, the hidden debt stood at 14.3 trillion yuan, which the government plans to reduce to 2.3 trillion yuan by 2028. However, the International Monetary Fund (IMF) has estimated that the total debt of LGFVs reached 60 trillion yuan, or 47.6% of China’s GDP, as of the end of 2023. Swapping this hidden debt for official debt is expected to save 600 billion yuan in interest payments over five years.
Economists, however, believe that this debt package may not be enough to address China’s economic difficulties. Carlos Casanova, Asia Senior Economist at UBP, stated that China likely needs a 23 trillion yuan package to effectively tackle the issue of unsold homes and meet the maturing debts of LGFVs. He expressed concern that the announced measures would not meet market expectations.
Lan Foan also mentioned that the government would introduce policies to support the state sector in purchasing unsold apartments and reclaiming undeveloped residential land from property developers. Additionally, he noted that efforts would be made to strengthen the capital of large state-owned banks, although the specifics of these measures remain unclear.
Moreover, the government is expected to focus on supporting manufacturing upgrades and expanding consumer subsidies for goods like appliances. This is part of an ongoing effort to stimulate domestic consumption, which has been sluggish due to factors like low wages, high youth unemployment, and a weak social safety net. Household spending in China is currently below 40% of GDP, significantly lagging the global average.
In the face of growing economic pressure and rising tariffs from the U.S. and other countries, experts continue to urge stronger fiscal measures to address China’s economic woes.