China announced a five-year package of measures totalling 10 trillion yuan ($1.4 trillion) to ease strains on local government financing and stabilise slowing economic growth.
The measures mark a shift away from the total stimulus strategies to revive growth that China has employed in the past. They aim to rebuild municipal balance sheets as a long-term goal, rather than directly injecting money into the economy.
Finance Minister Lan Foan told reporters on Friday that authorities plan to actively utilise the available deficit space, which might be expanded next year. According to him, the programme will take effect this year and run until the end of 2026, and will be worth about 2 trillion yuan a year.
Starting this year, the central government will issue special local government bonds worth 800 billion yuan annually for five years, totalling 4 trillion yuan. The policy will facilitate local governments’ efforts to reduce their so-called “hidden debt,” which could fall from 14.3 trillion yuan at the end of 2023 to 2.3 trillion yuan by 2028, according to Lan.
Tensions caused by a severe property market crisis from 2021, which has undermined revenue from auctions of residential land to developers, a key source of funding for cities and provinces, have threatened China’s 2024 economic growth target of around 5 per cent.
The package, presented at the end of a week-long parliamentary session, included raising the quota of local government debt by 6 trillion yuan over the next three years, with the new funds to be used to pay off “hidden debts.” However, the debt swap programme failed to meet many investors’ expectations of more direct fiscal support. The iShares China Large-Cap ETF (FXI) was down nearly 5 per cent in pre-market trading.
Nomura estimates China’s hidden debt is between 50 and 60 trillion yuan ($7 trillion to $8.4 trillion) and expects Beijing may allow local authorities to increase bond issuance by 10 trillion yuan over the next few years.
Beijing will step up efforts to support upgrading of production equipment and expand a consumer subsidy scheme targeting the purchase of home appliances and other goods, according to the finance minister. This is reinforced by the fact that many economists have long favoured stronger consumer incentives, especially as China faces ever-higher duties on its exports from Washington and other capitals in Europe and elsewhere.
