Michelle ThompsonChina has greenlit a 10 trillion yuan ($1.4 trillion) plan to stimulate its economy by letting local governments refinance debt. Finance Minister Lan Fo’an announced that local authorities can borrow up to 6 trillion yuan ($838 billion) over three years to replace “hidden debt” from risky local financing platforms. An additional 4 trillion yuan ($558 billion) in special bonds over five years aims to reduce local debt.
Lan stated the fiscal shortfall arose from multiple factors this year, affecting central and local revenues. Economist Mark Williams noted this 0.5% of GDP package offers limited impact, calling it insufficient stimulus. Years of strict COVID measures and a real estate slump have drained government resources, leading to debt and even service disruptions in some areas.
China’s hidden debt, totaling 14.3 trillion yuan ($1.99 trillion) at the end of 2023, is targeted for reduction to 2.3 trillion yuan ($320 billion) by 2028.
Achieving a growth target
Larry Hu, the chief China economist at Macquarie Bank, was surprised by the size of the debt swap, even though some people thought it was underwhelming. “Those who anticipated that the NPC meeting would approve a significant fiscal package may find this disappointing. However, “the policy goal is to achieve the GDP growth target and reduce tail risks, not to reflate the economy in any meaningful way, so the expectation is unrealistic,” he said.
The term “reflating the economy” describes policies intended to boost economic expansion and fight deflation, which has grown to be a recalcitrant issue in China. Policies far more aggressive than debt swaps would be needed for those efforts.
In the three months from July to September, China’s GDP increased by a mere 4.6% in comparison to the same period last year.
