Sonali Ray, writer
Brief news
- China announced a 5-year plan to tackle local government debt, allocating 10 trillion yuan ($1.4 trillion) and expanding the debt ceiling by 6 trillion yuan.
- The initiative aims to reduce hidden debt from 14.3 trillion yuan to 2.3 trillion yuan by 2028.
- Despite market expectations for more direct financial assistance, analysts predict cautious fiscal policies amid uncertainties from U.S. trade policies.
Detailed news
BEIJING – The A five-year plan with a total of 10 trillion yuan ($1.4 trillion) was announced by China on Friday in order to address the issues of local government debt. Additionally, China indicated that additional economic help will be provided in the following year.
On Friday, the Minister of Finance, Lan Fo’an, stated to the press that the government intended to “actively use” the existing deficit space that has the potential to be enlarged in the next year. It was in October that he had stated that the space available to take this move was “rather large.” He called back to that month.
His remarks, which were translated by CNBC, were made after the National People’s Congress, which is the standing committee of China’s parliament, concluded a five-day conference on Friday. The assembly accepted a plan to provide an additional six trillion yuan to expand the debt ceiling for local governments.
Approximately two trillion yuan would be spent annually on the initiative, according to Lan, who told reporters that it will begin this year and continue until the end of 2026.
As an additional point of interest, he mentioned that beginning this year, the central authorities will begin issuing local government special bonds at a rate of 800 billion yuan year for a period of five years, resulting in a total of 4 trillion yuan.
It is estimated that the so-called “hidden debt” of local governments may decrease from 14.3 trillion yuan as of the end of 2023 to 2.3 trillion yuan by the year 2028, according to Lan, who stated that the measures will contribute to the efforts of local governments to reduce their outstanding debt. The new regulations, he pointed out, would reduce the amount of pressure that is placed on local authorities and free up cash that might be used to boost economic growth.
“The local government’s hidden debt resolution measures introduced by China today are a concrete manifestation of the central government’s economic policy shift,” said Haizhong Chang, executive director for corporates at Fitch Bohua. “The total debt amount beats market expectations, to a certain extent,” Chang said. “We are a concrete manifestation of the central government’s economic policy shift.”
According to what he stated, “the scale is significantly larger this time and in comparison to the amount of debt resolution that has occurred in recent years.”
Despite this, the debt exchange scheme did not live up to the expectations of many investors, who had anticipated greater direct financial assistance. During the premarket trading session, the iShares China Large-Cap ETF (FXI) had a decline of approximately 5%.
“While the market may have to wait for more substantial policy changes, the potential for future monetary and fiscal measures remains,” Chaoping Zhu, a global market strategist at J.P. Morgan Asset Management headquartered in Shanghai, said in a note. Zhu is based in Shanghai. It is possible that factors such as a significant correction in the stock market, headwinds in exports, or rising budgetary constraints on local governments might serve as catalysts for the escalation of policy.
A series of stimuli
Since the end of September, the authorities in this region have increased the number of stimulus announcements, which has contributed to a rebound in the stock market. During a meeting that took place on September 26, President Xi Jinping called for the strengthening of fiscal and monetary assistance as well as the ending of the fall in the real estate market.
In spite of the fact that the People’s Bank of China has already reduced a number of interest rates, the fiscal policy of the nation, which is overseen by the Ministry of Finance, would necessitate significant increases in government expenditure and debt, requirements that would require permission from the legislature.
According to official media, the authorities had authorized an unusual rise in China’s deficit to 3.8%, up from 3%, during a meeting that was quite similar to the one that took place in October of the previous year. At the gathering that took place this year, such a change was not announced.
Officials were reportedly evaluating the idea to increase the limit on the amount of debt that local governments may take on in order to solve hidden debt, according to daily official readouts of the parliamentary meeting that took place this week.
Analysts anticipate an increase in the magnitude of fiscal assistance following the victory of Donald Trump in the presidential election in the United States this week. Trump has vowed to impose punitive taxes on commodities imported from China. On the other hand, there are many who continue to be cautious, expressing concern that Beijing would continue to be conservative and refrain from providing direct help to consumers.
Larry Hu, chief China economist at Macquarie, stated in a study that was released on Friday that “we do not expect policymakers to increase stimulus this year because they need to know more about the new trade policy of the United States government.” The National Policy Committee meeting that took place this week was centered on debt swap rather than additional stimulus.
In a press conference that took place a month ago, Lan underlined the need of addressing the financial challenges that are faced by local governments while discussing the planned fiscal support.
Nomura thinks that China has concealed debt in the range of 50 trillion to 60 trillion yuan, which is equivalent to $7 trillion to $8.4 trillion. The institution also anticipates that Beijing may let local authorities to boost the amount of debt that is issued by 10 trillion yuan over the course of the next few years.
According to Nomura, this might have the potential to save local governments 300 billion yuan in interest payments each year.
A substantial source of revenue for local governments has been severely restricted in recent years as a result of the real estate crisis that has been sweeping the nation. During the course of the pandemic, regional authorities have also been required to fund the management of the COVID-19 virus.
According to a study by the International Monetary Fund, domestic Chinese government debt has already reached 22% of GDP by the end of 2019, which is far more than the rise in income that is available to pay off that debt. This was the case even before that point.
Source : CNBC news
