China Unveils 10 Trillion Yuan Debt Package

By Kevin Yao and Ellen Zhang
BEIJING (Reuters) – China unveiled a 10 trillion yuan ($1.40 trillion) debt package on Friday to ease local government financing strains and stabilize flagging economic growth amid fresh pressure from the re-election of Donald Trump as U.S. president.

The measures confirm last week's Reuters report and mark a departure from the all-out stimulus strategies previously used to revive growth in China. Instead, these measures aim to repair municipal balance sheets as a medium- to longer-term objective without providing a direct money injection into the economy.

Finance Minister Lan Foan indicated that while more stimulus is coming, analysts suggest Beijing may be cautious about fully deploying its resources until Trump officially takes office in January. Investors hoping for a significant fiscal boost may be disappointed.

"I don't see anything that exceeds expectations," stated Huang Xuefeng, research director at Shanghai Anfang Private Fund Co. "It's not huge if you look at the fiscal shortfalls."

The funding will primarily address hidden debts, instead of generating new economic activity, limiting direct support for growth. Local governments, burdened by high debt and declining revenues, have cut civil servants' salaries and accrued debts with private sector firms, choking money flows to the real economy and exacerbating deflationary pressures.

These financial strains result from a severe property crisis since 2021 that heavily impacted revenues from residential land auctions—an essential funding source for municipalities—threatening China's 2024 growth target of approximately 5%.

Trump's re-election poses additional risks, with threats of tariffs exceeding 60% on all Chinese goods, rattling manufacturers and accelerating factory relocations to Southeast Asia and other regions. Exporters warn that tariffs will shrink profits, negatively impacting jobs and investments, while worsening China's industrial overcapacity and fueling deflation.

The debt package announced at a week-long parliament meeting includes increasing local governments' debt quota by 6 trillion yuan over the next three years and allowing municipalities to use another 4 trillion yuan over five years already approved by Beijing to repay hidden debts.

Beijing refers to hidden debts as the loans, bonds, and shadow credits from local government financing vehicles (LGFVs). As of the end of 2023, these debts stood at 14.3 trillion yuan, but authorities aim to reduce this to 2.3 trillion yuan by 2028. The IMF estimates LGVF debts were 60 trillion yuan, or 47.6% of GDP at the end of 2023.

Converting hidden debts to official debt could save local governments 600 billion yuan in interest over five years. Carlos Casanova, Asia senior economist at UBP, estimated that a debt package of 23 trillion yuan would be necessary to clear unsold homes and repay maturing LGFV debts.

Casanova predicts the announced measures will disappoint the market, as China requires more comprehensive support.

MORE SUPPORT

Lan reiterated the government's intention to issue policies supporting state sector purchases of unsold apartments, reclaim undeveloped land from developers, and replenish the capital of large state banks. However, specifics regarding the size or timing of these measures remain undisclosed. These actions represent a more direct means of injecting fiscal support into the economy.

The lack of direct fiscal stimulus indicates that policymakers may hold back until they better understand the implications of Trump's presidency, according to Xing Zhaopeng, senior China strategist at ANZ. Lan also mentioned intensifying efforts to support manufacturing upgrades and expanding consumer subsidy schemes for purchasing appliances.

Economists have long advocated for stronger consumer stimulus, especially in light of rising tariffs from the U.S. and other regions. Low wages, high youth unemployment, and a weak social safety net contribute to China's household spending being below 40% of GDP, about 20 percentage points lower than the global average.

Casanova believes direct fiscal stimulus targeting consumption is unlikely in the near term and suggests that more significant economic distress would be required to realize such measures.

($1=7.1533 Chinese yuan renminbi)