China unveils $1.8 trillion plan to fix local govt debt; more action likely in case of trade war

SHENZHEN/BEIJING – Chinese officials on Nov 8 unveiled the country’s largest effort in recent years to address hidden local government debt, a longstanding drag on economic growth, but disappointed investors looking for a big fiscal stimulus package to directly boost the tepid economy.  

Beijing will roll out a 10 trillion yuan (S$1.8 trillion) package – of which 6 trillion is newly approved – for local governments to bring off-books arrears onto their balance sheets, senior officials including Finance Minister Lan Fo’an said at a press briefing, as top legislators wrapped up a closely watched five-day meeting. 

This measure does not amount to direct fiscal stimulus – which Mr Lan signalled was in the works – but is instead aimed at defusing risks to the financial system, and giving cash-strapped local governments more breathing room.

Observers hoping to learn how much China would spend to reflate its economy were left none the wiser.

Analysts, however, noted that Chinese officials may not have seen an immediate need for more stimulus, and could be reserving policy flexibility for after US President-elect Donald Trump, who during his first term from 2017 to 2021 started a bruising trade war with China, returns to the White House in January 2025.

China’s exports, a key driver of its economy, are in danger with Trump having pledged to impose tariffs of 60 per cent or more on Chinese goods this time round.

Mr Carlos Casanova, a senior Asia economist at Union Bancaire Privee in Hong Kong, said he expects Beijing to delay significant actions until there is clarity on Trump’s trade tariffs.

Local governments in China are responsible for the bulk of public spending, but have had their budgets squeezed in recent years by falling revenues and expensive debt repayments.

Of particular concern is their off-the-books debt – incurred through financing vehicles – which poses risks for the financial system in the event of widespread defaults.

These arrears were valued at 14.3 trillion yuan at end-2023, Mr Lan said. Other estimates are higher: The International Monetary Fund’s projection, for the same period, is about 60 trillion yuan.

With Beijing’s debt swap package, local governments will be able to convert 10 trillion yuan in hidden debts into bonds, which are cheaper to finance.

The standing committee of the National People’s Congress or legislature this week approved a 6 trillion yuan hike in local governments’ debt quotas, allowing them to issue an additional 2 trillion yuan in bonds each year from 2024 to 2026 to replace hidden loans.

Local governments will also be able to tap 4 trillion yuan in previously approved special bonds – 800 billion yuan each year from 2024 to 2028 – for the same purpose, said Mr Lan.

These moves, alongside existing initiatives, are aimed at reducing hidden local debt to 2.3 trillion yuan by 2028, and would save officials 600 billion yuan in interest repayments, he said.

Ms Erica Tay, director of macro research at Maybank Investment Banking Group, said the 6 trillion yuan figure was “substantial” – and higher than the 4.7 trillion yuan in debt swaps recorded over the last six years. 

The swaps would cut local officials’ debt-servicing burdens significantly, allowing them to direct limited resources towards higher spending on essential services, which is “precisely what’s needed to boost consumption”, she said.

But Ms Shan Guo, a partner at Hutong Research consultancy in Shanghai, thought the figure was “quite underwhelming”. It covered just a fraction of the hidden arrears, had to be spread across three years, and still required local governments to carry the debt burden themselves, she said.

At the press conference in Beijing, Mr Lan signalled that more fiscal support for the Chinese economy was en route.

The government was “actively planning” next steps, he said, with more supportive fiscal policies to be rolled out to achieve China’s economic goals in 2025.

These include making use of available room to raise deficits, expanding the issuance of special bonds, and increasing transfers from the central government to localities, he added.