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China has recently announced plans to save local governments through a massive $1.4 trillion stimulus package. This move comes after smaller steps were deemed insufficient to jumpstart the country’s slowing economic growth.
The Chinese government passed this ambitious plan on a Friday, giving local governments the opportunity to refinance their substantial debts which have been weighing them down and hindering their ability to meet financial obligations. This decision marks the final stage in a series of measures that China’s leaders began implementing in September to bolster growth, a move that became even more urgent after Donald J. Trump’s victory in the U.S. presidential elections.
President Trump has expressed intentions to impose additional tariffs on Chinese goods, potentially up to 60%, which could lead to retaliatory actions from China and further strain the already delicate relationship between the world’s two largest economies. Against this backdrop, China’s economic landscape has been grappling with challenges in regaining momentum this year.
The real estate market, a key indicator of economic health in China where most households derive their wealth, has been in a gradual decline. Plummeting home prices, averaging a 10% annual drop over the past three years, combined with a surge in foreclosures have dampened consumer confidence and spending. Moreover, local governments have accumulated significant debt levels over the years, leveraging loans for infrastructure projects and further borrowing during the COVID-19 pandemic, contributing to an unsustainable fiscal burden.
While the national government in China maintains relatively low public debt levels, its cities and provinces shoulder a substantial portion of this burden, exacerbating the economic challenges. Despite the worsening economic conditions, prior to the recent stimulus package, Beijing had been cautious in adopting drastic measures, preferring a growth strategy driven by government-led initiatives rather than direct consumer incentives.
In a significant shift, the government introduced measures to facilitate easier access to credit for individuals and businesses in late September. The Standing Committee of the National People’s Congress unveiled a plan enabling the government to borrow an additional $838 billion over three years and an extra $539 billion over five years. By allowing local governments to refinance debt with high-interest rates, they aim to inject liquidity into the system. However, some experts have called for more robust tax cuts for banks and the housing market to spur growth.
While the debt swap initiative is considered crucial, economists caution that it only addresses a fraction of the local government debt. A significant portion of this debt remains undisclosed, tucked away in off-budget accounts. Recent assessments by the International Monetary Fund revealed a hidden debt load estimated at $8.3 trillion, underscoring the magnitude of the challenge faced by regional governments.
Victor Shih, a leading expert on Chinese finance and politics, highlighted the doubling of regional government debt between 2018 and 2023. He noted that the financial strain has led to delayed payment of wages for city and county-level employees, impacting the spending power of the middle class. The projected savings of $84 billion over five years, outlined by officials, may not be sufficient to stimulate real economic activity, according to Mr. Shih.
The current stimulus echoes similar efforts in 2015 when the Chinese government permitted local governments to refinance around $1.6 trillion over three years. Despite these measures, critics argue that the root causes of the debt issue remain unaddressed. Wang Tao, a prominent economist at UBS, asserted that the recent initiatives alleviate short-term debt servicing challenges but do not provide a long-term solution to local government indebtedness.
In addition to financial measures, the People’s Bank of China has implemented interest rate reductions and relaxed mortgage terms to stimulate the housing market. The government’s efforts to encourage home purchasing by lowering down payment requirements have been complemented by increased lending by state-controlled banks. These strategies have resulted in a rebound in China’s stock markets, with indices such as the CSI 300 registering significant gains.
However, the response from investors to the stimulus package has been mixed, with some expressing disappointment leading to declines in stock prices. While the economy has managed to meet its growth targets averaging around 5%, analysts like Larry Hu from Macquarie Group suggest that more substantial measures are necessary to revive demand in the housing sector.
Looking ahead, the Central Economic Work Conference slated for the following month may unveil further economic policies and financial injections. Nonetheless, experts caution that additional funding alone will not suffice in resolving the systemic challenges faced by the Chinese economy. Despite the substantial investment, specialists like Victor Shih argue that these measures may merely postpone the underlying issues, underscoring the necessity for comprehensive economic reforms to address China’s structural weaknesses.
