China on Friday, November 8, announced a five-year package of measures totaling 10 trillion yuan ($1.4 trillion), designed to solve the debt problems of local governments.
It is worth noting that the mentioned decision by Beijing is also an unambiguous signal that next year the economic system of the Asian country, which is the second largest in the world and is currently going through a difficult period, will receive additional support. Analysts have repeatedly argued that China needs to take large-scale economic stimulus measures. In the context of these statements, it has always been mentioned that the lack of assistance from the central government in the practical plane will mean a lack of sources of growth impulses.
Beijing, as part of its traditional public relations practice, adheres to a kind of minimal communication tactic. This means, among other things, that the Chinese authorities do not discuss in public the state of affairs in the economic system in the context of a detailed analysis. At the same time, the very fact that Beijing has decided on support measures is, in a sense, a significant statement. In this case, the Chinese authorities actually recognize that the country’s economic system is in a difficult situation.
Currently, in the economic context, the crisis in the real estate market is a significant problem for Beijing. For several years, a downturn has been observed in the mentioned market, which has signs of a fundamental process with the prospect of generating long-term structural consequences. Beijing is also currently facing the problem of weak domestic consumption. Moreover, it is worth noting the drop in confidence on the part of investors and consumers. All mentioned factors are holding back the growth of the world’s second-largest economy and clouding the prospects of the corresponding dynamic.
It is worth noting that the dynamic of the world’s second-largest economy is already showing a negative tendency. In the first quarter of 2024, China’s gross domestic product (GDP) grew by 5.3% year-on-year. Then the upward dynamic of this indicator slowed down. In the second quarter of 2024, the Asian country’s GDP grew by 4.7%. In the third quarter of the current year, the corresponding indicator rose by 4.6%. In this case, there is what can be described as a gradual weakening of the growth momentum. It is obvious that without measures to stimulate economic activity, the financial situation in China will continue to move along a deteriorating trajectory.
It is also worth noting that for Beijing, the present state of affairs in the area of geopolitics is a sensitive pressure factor. Currently, there is a consistent increase in tension in this space. The condition of relationships between some world capitals is deteriorating, gradually approaching the verge of fundamental degradation of cooperation. The corresponding tendency is relevant to China’s relations with the United States and the countries of the European Union. Also, the victory of Donald Trump in the US presidential election means a high probability of an increase in tariffs on goods imported from an Asian country. If the appropriate decision is made, Beijing will face significant economic losses. In this context, it is worth noting that export activity is currently the most important factor in the growth of the world’s second-largest economy, which upward strength is gradually decreasing.
Chinese Finance Minister Lan Fo’an told reporters on Friday that the authorities of the Asian country authorities planned to actively use the available deficit space that can be expanded next year. It is worth noting that in October, this minister stated that it was highly likely that a decision would be made on the measures that were announced on Friday.
Also this week, China approved a proposal to allocate an additional 6 trillion yuan to increase the debt limit for local governments.
The Finance Minister said that the program comes into force in the current year and will last until the end of 2026. In this case, the amount of financing is about 2 trillion yuan per year. The minister also noted that starting in 2024, the central authorities will annually issue special bonds to local governments for 800 billion yuan. The implementation of the relevant measures will last five years. This means that the total amount of the mentioned bonds will be 4 trillion yuan.
It is worth noting that in China, local governments have been making efforts for a long time to reduce their so-called hidden debt. Lan Fo’an estimates that this figure was 14.3 trillion yuan at the end of last year. The minister also said that the mentioned debt could decrease to 2.3 trillion yuan by 2028. According to him, the new measures will ease the pressure on local governments and free up funds to support economic growth.
Haizhong Chang, executive director for corporations at Fitch Bohua, said that the decision announced on Friday to resolve the hidden debt is a concrete manifestation of the shift in the economic policy of the central government of China. The expert also noted separately that the total amount of debt exceeds market expectations to a certain extent.
Haizhong Chang also stated that the current scale of debt resolution is significantly larger than the scale seen in recent years.
It’s worth noting that the debt swap program in a negative sense did not match the expectations of many investors for more direct fiscal support. The iShares China Large-Cap ETF (FXI) was nearly 5% lower in premarket trading.
Chaoping Zhu, Shanghai-based global market strategist at JPMorgan Asset Management, said in a note that the market may have to wait for more significant policy changes, but the potential for future fiscal and monetary measures remains. According to the expert, a deep correction in the stock market, export headwinds, and growing fiscal pressure on local governments can become catalysts for policy escalation.
It is worth mentioning that since the end of September in China, local governments have strengthened measures to stimulate the economy. Against the background of these actions, an increase in shares was recorded. Also, at the end of September, the head of the People’s Republic of China, Xi Jinping, called for stopping the downturn in the real estate market and strengthening fiscal and monetary support.
The People’s Bank of China has already cut interest rates, but at the same time, the fiscal policy of the Asian finance ministry will require a significant increase in government debt and spending. The relevant measures can be implemented only if approved by parliament.
It is also worth mentioning that in October last year, the Chinese authorities made a rare and, in a certain sense, uncharacteristic decision for Beijing as a political center to approve an increase in the Asian country’s budget deficit. After this decision, the mentioned index increased from 3% to 3.8%. The relevant information was published by China’s media. In the current year, the Asian country’s budget deficit indicator has not yet shown any changes.
This week, data circulated in the information space, according to which Chinese officials are currently considering the possibility of implementing a proposal to increase the debt limit of local governments. According to media reports, this potential measure is positioned as a way to solve the problem of hidden debt.
Also, many analysts currently expect that Beijing will decide to increase the scale of fiscal support in the foreseeable future. According to media reports, the relevant assumptions of experts are based on the fact that after the victory of Donald Trump in the presidential election of the United States, the probability of tightening Washington’s tariff policy has significantly increased. At the same time, analysts warn that Beijing, against the background of the mentioned potential measures by the US, may continue to follow a conservative approach. The corresponding wording implies the likelihood that the Chinese central authorities will not provide direct support to consumers, whose low activity in the context of what can be described as purchasing actions has already become a factor constraining the growth of the world’s second-largest economy. It is worth noting that analysts have repeatedly stated that Beijing needs to take effective and large-scale measures to revive economic activity. At least more than a year has passed since the first such calls before the People’s Bank of China unveiled a broad package of monetary stimulus measures in September.
It is also worth mentioning that many analysts and investors perceived the end of quarantine related to the coronavirus pandemic in the Asian country as a kind of unconditional initial moment of recovery of the local economy. It is worth noting that the coronavirus has become a kind of large-scale shock factor for the whole world. This tendency has been fully manifested in the economic space. For example, global supply chains have been disrupted due to the pandemic. The Chinese economy has also faced a sensitive negative effect of the coronavirus, including not only as a disease but also as an emergency situation that disrupts many processes. After the quarantine in the Asian country was completed, the local economic system, alas, did not demonstrate large-scale growth, expectations for which were significant and were perceived by many as guaranteed in terms of the likelihood of implementation. At the same time, Beijing, in the context of the economic condition, is still, in a certain sense, facing what can be described as a kind of echo of the coronavirus. In this case, it implies the continued existence of negative components of the economic situation in the Asian country.
Larry Hu, chief China economist at Macquarie, said in a report Friday that there is no expectation that Chinese policymakers will step up stimulus measures this year as they need to get more information about the new United States trade strategy.
Nomura estimates that the hidden debt of the Asian country currently ranges from 50 trillion yuan to 60 trillion yuan. Experts of this Japanese company also suggest that Beijing may allow local governments to increase debt issuance by 10 trillion yuan over the next few years. Nomura claims that the appropriate solution would save local governments 300 billion yuan in interest payments per year.
In the mentioned context, it is also worth noting the negative impact of falling real estate prices in China. Against the background of this downward dynamic local governments are faced with the limitation of a significant source of revenue. Regional authorities are also faced with the need to spend substantial funds to combat the coronavirus.
The report of the International Monetary Fund contains information according to which, as of the end of 2019, before the coronavirus pandemic, local Chinese government debt was 22% of the Asian country’s GDP. With maximum probability, after the difficulties of the last few years, this indicator has increased.
