China Stimulus: $1.4 Trillion Booster By Beijing- Who Will Gain?

Fresh Stimulus Announced in China: China launched new fiscal support measures on Friday to address economic challenges, including relief for local governments facing high debt repayment pressures. Finance Minister Lan Foan indicated further stimulus plans are underway.

Beijing will allow local governments to allocate 10 trillion yuan ($1.4 trillion) to reduce off-balance sheet, or “hidden,” debt as worries mount over China’s economic outlook. The recent US election win by Donald Trump, who has threatened tariffs exceeding 60 per cent on Chinese goods, has added to these concerns.

Debt quota for local government to rise by 6 trillion yuan

The debt quota for local governments will be raised by 6 trillion yuan, with an additional 4 trillion yuan in approved issuance available to fund debt swaps aimed at reducing systemic financial risks, according to officials. 

Facing significant deflationary pressures, a property sector crisis, and financial strain on indebted local governments, China’s economy has slowed, limiting new investment. In response, China’s National People’s Congress (NPC) approved an increase in the local government special bonds ceiling to 35.52 trillion yuan, up from 29.52 trillion yuan.

The debt swap plan, initially reported by Reuters, is intended to address local debt risks, NPC’s vice chairman of the financial and economic affairs committee Xu Hongcai said in a press briefing. 

Support for real estate sector

Finance Minister Lan added that policies are forthcoming to support state sector purchases of unsold apartments, reclaim undeveloped land from property developers, and bolster the capital of major state banks, though he did not specify the timing or scale.

A stronger-than-expected monetary stimulus in September raised investor expectations for a large-scale fiscal programme to stimulate the economy, leading to a surge in Chinese stocks. However, debt swaps are seen as stabilisers for growth rather than direct stimulants.

China faces challenges from previous stimulus efforts, which created substantial debt, particularly through local government financing vehicles (LGFVs) that financed infrastructure projects. High debt levels now restrict new investment.

Hidden debt soars

Lan noted that local governments’ “hidden debt” reached 14.3 trillion yuan by the end of 2023, with a goal to reduce this to 2.3 trillion yuan by 2028. The International Monetary Fund (IMF) estimates that LGFV debts reached 60 trillion yuan, or 47.6 per cent of GDP , by the end of 2023.

The debt swaps are projected to save local governments 600 billion yuan in interest costs over five years. The total central and local government debt stood at 147 trillion yuan, or 117 per cent of GDP, as of the end of 2023, according to the IMF. LGFVs’ debt load, including loans, bonds, and shadow credits, remains a significant risk in China's financial system, particularly in a weakened economy.

(With Reuters inputs)