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China has recently announced a massive $1.4 trillion plan to provide support to local governments in the country. This plan comes after a series of smaller steps had been promised earlier to kickstart economic growth. However, economists had previously mentioned that these measures were not sufficient to combat China’s slow economic growth.
The latest support plan was passed by the Chinese government on Friday. As part of this plan, local governments were given the green light to refinance their substantial debts, which had been causing financial strain and making it difficult for some cities to meet their financial obligations.
This move is seen as the final step in a series of initiatives that China’s leaders have been implementing since September to bolster economic growth. The significance of these measures has become even more pronounced in light of Donald J. Trump’s recent election as the President of the United States. Trump has indicated that he may impose additional taxes of up to 60% on Chinese goods imported into the US. Such a move could prompt a strong response from China, potentially exacerbating tensions between the two largest economies in the world.
China has been facing economic challenges this year as it struggles to regain its footing. The gradual decline in the real estate market, a key source of wealth for many Chinese families, has led to lower consumer spending as people become more cautious due to falling home prices and a surge in foreclosures.
Local governments have also been grappling with high levels of debt. Over the years, these governments resorted to large loans to fund infrastructure projects, further increasing their debt burden during the COVID-19 pandemic. On the other hand, China’s national government has relatively low public debt, as a significant portion of its expenditure is directed towards cities and provinces.
Despite the worsening economic conditions, the Chinese government had not taken significant steps to address these challenges until September. Traditionally, Beijing had favored government-led growth over direct stimulus for consumers. However, in September, the government decided to make it easier for individuals and businesses to access credit.
The Standing Committee of the National People’s Congress unveiled a plan last Friday, allowing the government to borrow an additional $838 billion over three years and $539 billion over five years. By enabling local governments to refinance their high-interest debts, they would have more liquidity. Although some experts were hoping for more robust tax cuts for banks and the housing market, the debt swap is considered a crucial step to reduce a portion of the local government’s debt burden.
A significant proportion of local government debt is off the books and does not appear in official budgets. The International Monetary Fund reported last year that this undisclosed debt amounted to $8.3 trillion. From 2018 to 2023, debt among most regional governments in China doubled, according to Victor Shih, a China expert at the University of California, San Diego. Several local governments have been unable to pay the salaries of their employees for an extended period due to their mounting debt, affecting consumer spending.
However, critics argue that the projected savings of $84 billion for local governments over five years are relatively insignificant in the grand scheme of things. Victor Shih explained that while the plan addresses debt issues, it falls short in terms of stimulating the real economy.
The government last intervened to assist local governments in 2015, allowing them to refinance approximately $1.6 trillion over three years. Wang Tao, a top China economist at UBS, noted that the current measures do not address the root of the debt problem, although they may alleviate short-term debt repayment challenges.
In September, the People’s Bank of China lowered short-term interest rates and existing mortgage rates, reduced the minimum down payment for property purchases, and encouraged state-controlled commercial banks to increase lending. These measures aimed to boost consumer spending, particularly in the housing market.
Recent months have seen various Chinese municipalities ease restrictions on property purchases to encourage homebuyers. The surge in China’s stock markets following the stimulus package has been a prominent outcome, with the CSI 300 index in Shanghai and Shenzhen rising by over 20% since September 24.
However, initial market reactions to the new stimulus measures revealed investor disappointment, with stock prices in Hong Kong declining after trading hours. While the government’s actions have helped the economy achieve its growth target of around 5%, there are concerns that these measures may not be sufficient to stimulate demand in the property market.
Larry Hu, chief China economist at Macquarie Group, emphasized the need for a more substantial stimulus to address underlying issues in the economy. He stated that additional measures may be required after the upcoming Central Economic Work Conference, an annual meeting that sets economic policy.
In conclusion, China’s $1.4 trillion support plan aims to provide a lifeline to local governments struggling with high debt levels. While these measures have been instrumental in addressing immediate challenges, experts suggest that more substantial reforms may be necessary to address the deeper structural issues in China’s economy. As the world closely watches the unfolding economic developments in China, the government’s ability to navigate these challenges will be crucial in determining the country’s future economic trajectory.
