China has recently announced a $1.4-trillion plan aimed at saving local governments and revitalizing the economy. This plan marks the latest effort by China’s leaders to kickstart growth, following smaller measures that fell short of addressing the country’s sluggish economic performance. Economists have expressed concerns that the previous steps taken were insufficient to boost China’s slowing growth trajectory.
The comprehensive support plan, unveiled on Friday, represents a significant move by the Chinese government to jumpstart economic activity. As part of this plan, local governments have been granted approval to refinance their massive debts, which have left some cities struggling to meet financial obligations. This initiative is the culmination of a series of actions initiated by China’s leadership starting in September with the aim of stimulating growth.
The urgency of these economic measures has been further underscored by the recent election of Donald J. Trump as the next President of the United States. Trump’s campaign promises to impose additional taxes of up to 60% on Chinese goods have heightened tensions between the two largest economies in the world, prompting China to bolster its economic resilience.
In recent years, China has faced challenges in reviving its economy, exacerbated by the gradual decline of the real estate market. The subdued performance of the real estate sector, a key source of wealth accumulation for many Chinese households, has dampened consumer sentiment and hampered overall expenditure. Home prices have been on a downward trend, with annual declines of around 10%, leading to a surge in foreclosures.
Local governments have also been grappling with mounting debt levels accumulated to fund various infrastructure projects, exacerbating financial strains. These debt burdens were further amplified during the COVID-19 pandemic, as local authorities sought additional funds to navigate the crisis. While China’s central government maintains a relatively low level of public debt, much of its spending is channeled to regional governments and provinces.
Despite the escalating economic challenges, Chinese policymakers had been slow to implement substantial reforms to address these structural issues. Beijing traditionally favored government-led growth over direct stimulus to consumers and businesses. However, in a departure from this stance, the government took decisive action in September to facilitate easier access to credit for individuals and enterprises.
The recent announcement by the Standing Committee of the National People’s Congress reveals a multi-pronged strategy to inject liquidity into the economy. The plan entails an additional borrowing of $838 billion over three years and $539 billion over five years, aimed at relieving financial pressures on local governments. By enabling local authorities to refinance high-interest debts, the government seeks to bolster cash flow and support economic recovery. While some analysts anticipated more aggressive tax cuts for financial institutions and the housing sector, the debt swap scheme has been viewed as a pivotal step in alleviating fiscal strains.
Notably, a substantial portion of local government debt remains concealed in off-balance sheet accounts, evading official scrutiny and raising concerns about financial transparency. Estimates by the International Monetary Fund suggest that such undisclosed debts amount to around $8.3 trillion, underscoring the magnitude of the challenge. Financial experts like Victor Shih have noted a sharp rise in regional government debt in recent years, compounding fiscal risks and hindering timely payment of wages to municipal employees.
While the debt relief package is a significant move, analysts caution that it only scratches the surface of China’s local government debt crisis. The $84 billion in savings projected over five years is deemed insufficient to address the broader economic ramifications of mounting debts. Given the systemic risks posed by bloated government liabilities, a more comprehensive approach is warranted to achieve sustainable economic recovery.
The Chinese government’s efforts to tackle local government debt are not entirely new, as similar measures were implemented in 2015 to aid distressed regions. However, critics argue that such temporary relief measures fail to address the root causes of the debt issue. Wang Tao, a leading economist at UBS, contends that the current initiatives fall short of resolving the structural imbalances that underpin local government debt.
In addition to debt refinancing, the Chinese central bank has undertaken stimulus measures to stimulate economic activity. These include cutting short-term interest rates, reducing mortgage rates, and relaxing home purchase requirements to spur consumer spending. State-controlled commercial banks have also been encouraged to extend credit, aimed at boosting investment and bolstering financial markets.
The stimulus measures have yielded some positive outcomes, evident in the recent uptick in China’s stock market performance. The CSI 300 index, comprising major companies listed in Shanghai and Shenzhen, has surged over 20% following the central bank’s policy revisions in September. However, the initial lukewarm response from investors to the stimulus package has underscored lingering concerns about the economy’s overall health.
While the stimulus efforts have succeeded in meeting short-term growth targets, experts like Larry Hu caution that fundamental issues such as weak domestic demand remain unaddressed. Hu argues that a more substantial stimulus package is needed to galvanize consumer spending and mitigate structural vulnerabilities within the housing market. Despite the temporary reprieve offered by the current measures, the underlying economic challenges persist and necessitate a more comprehensive and enduring strategy.
Looking ahead, China’s economic policymakers are expected to calibrate further stimulus measures following the Central Economic Work Conference in the approaching months. Additional fiscal injections may be on the horizon to sustain economic momentum and mitigate the downside risks posed by mounting debt burdens and sluggish growth. However, experts emphasize the imperative of implementing structural reforms to address the underlying weaknesses in China’s economy and foster long-term sustainability.
In conclusion, China’s $1.4-trillion rescue plan represents a pivotal effort to mitigate the economic fallout of local government debts and revitalize growth. While the stimulus measures have shown initial signs of efficacy, the underlying challenges facing the economy necessitate a more comprehensive and enduring strategy. By addressing structural vulnerabilities and fostering sustainable growth, China can navigate the uncertain economic landscape and chart a path towards robust recovery.
