China announces $1.4 trillion package over five years to tackle local governments’ ‘hidden’ debt

China Unveils $1.4 Trillion Plan to Tackle Local Government Debt Issues

China recently announced a massive five-year plan totaling 10 trillion yuan ($1.4 trillion) aimed at addressing local government debt problems. This announcement came after the National People’s Congress approved a proposal to allocate an additional 6 trillion yuan to increase the debt limit for local governments.

Minister of Finance Lan Fo’an stated that authorities would make active use of the available deficit space, which can be expanded next year. The plan includes issuing 800 billion yuan in local government special bonds annually for the next five years, totaling 4 trillion yuan. This initiative aims to reduce local governments’ “hidden debt” from 14.3 trillion yuan in 2023 to 2.3 trillion yuan by 2028.

Haizhong Chang, executive director for corporates at Fitch Bohua, noted that the scale of debt resolution in this plan exceeds market expectations and signals a significant shift in China’s economic policy. While some investors were hoping for more direct fiscal support, the debt swap program fell short of those expectations, causing a dip in the iShares China Large-Cap ETF.

Authorities in China have been increasing stimulus measures since September, with President Xi Jinping leading a meeting to strengthen fiscal and monetary support. The People’s Bank of China has already cut interest rates, while the Ministry of Finance is set to increase government debt and spending, pending parliamentary approval.

Analysts anticipate further fiscal support following the U.S. presidential election results, but caution that Beijing may remain conservative in issuing direct support to consumers. Lan emphasized the importance of addressing local government debt issues during a press conference last month.

Nomura estimates that China has 50 trillion to 60 trillion yuan in hidden debt, and predicts that local authorities could increase debt issuance by 10 trillion yuan over the next few years. This move could save local governments 300 billion yuan in interest payments annually.

The country’s real estate market slump and expenses related to Covid-19 controls have strained local government finances in recent years. Prior to the pandemic, local Chinese government debt had grown to 22% of GDP by the end of 2019, surpassing revenue growth to cover the debt, according to an International Monetary Fund report.

Overall, China’s ambitious plan to tackle local government debt issues signals a proactive approach to stabilizing the economy and supporting growth in the coming years. The focus on addressing hidden debt and increasing fiscal support demonstrates a commitment to managing financial challenges and promoting sustainable economic development.