In a bid to alleviate the mounting debt burden plaguing its local governments, China has unveiled a sweeping 10 trillion yuan ($1.4 trillion) support package. The announcement, made during a meeting of the nation’s top legislative body, the National People’s Congress Standing Committee, comes as the world’s second-largest economy grapples with slowing growth and deflationary pressures.
Expanding Debt Ceilings and Swapping Hidden Debt
The cornerstone of the fiscal package is a provision to raise debt ceilings for local governments by a staggering 6 trillion yuan over the next three years. This move aims to enable these entities to replace their hidden debt, which reportedly stood at 14.3 trillion yuan by the end of 2023, with more transparent and manageable obligations.
Hidden debt, as defined by the International Monetary Fund, refers to borrowing for which a government is liable but fails to disclose to its citizens or other creditors. In the aftermath of the 2008 financial crisis, local governments in China increasingly relied on financing vehicles to amass hidden debt as they poured money into infrastructure projects, according to the South China Morning Post.
Deflationary Pressures and Private Sector Debt
As these debts ballooned, local governments found themselves in a precarious position. Falling revenues forced them to cut civil servant pay, withhold wages, and accumulate debts with the private sector. These actions have contributed to deflationary pressures in the Chinese economy.
The debt relief package is China’s “most powerful debt reduction measure in recent years,” according to state broadcaster CCTV, allowing local governments “to better develop the economy and protect people’s livelihood.”
Accounting Exercise or True Debt Resolution?
However, not everyone is convinced that the measure goes far enough. Prof. Victor Shih, an expert on Chinese banking and fiscal policies at the University of California, San Diego, argues that the package “doesn’t come close to resolving the enormous local government debt problem.” He characterizes it as an “accounting exercise” that moves hidden debt onto the books without truly bailing out local governments or addressing civil servant pay arrears.
Prof. Shih also casts doubt on the official figure of 14.3 trillion yuan in hidden debt, suggesting that the true number is likely closer to 50 trillion yuan or more.
More Measures to Come as Growth Slows
The support package announcement comes as China’s economic growth has slowed to 4.6% in the third quarter of 2024, falling short of the government’s 5% target. Many observers had anticipated bolder measures to stimulate consumer spending and revitalize the economy.
Finance Minister Lan Fo’an hinted that additional measures are in the pipeline but provided no specifics. Some speculate that Beijing may have been waiting for the outcome of the U.S. presidential election, as the victorious candidate, Donald Trump, had vowed during his campaign to impose substantial tariffs on Chinese exports.
According to a close source, “Export has been the main engine of economic growth in China for the past four years. So without additional stimulus from the government, I think growth is going to be under pressure if the U.S. introduces tariffs.”
As China navigates this challenging economic landscape, the world will be watching closely to see if the debt support package proves sufficient to ease the strain on local governments and set the stage for a robust recovery. With the specter of U.S. tariffs looming and domestic demand remaining sluggish, the pressure is on for Chinese policymakers to find the right mix of measures to reinvigorate growth and maintain stability.
