In the aftermath of this past week’s US Presidential Election results, China has announced a Rmb10tn ($1.4tn) fiscal package to bail out local governments and help shore up its faltering economy. The move comes as China braces for increased trade tensions with the US under Donald Trump, who has been exceedingly vocal in his desire to impose substantially higher tariffs on international routes.
The long-awaited fiscal plan is one of the biggest to target the country’s troubled local authorities. Still, it disappointed investors expecting more support for flagging household consumption in the world’s second-largest economy. The measures announced on Friday by the National People’s Congress, China’s rubber-stamp parliament, follow a monetary stimulus package released in September that was Beijing’s biggest since the coronavirus pandemic.
The Role of Local Governments in Bailouts
As part of the bailout, Beijing would authorize local governments to issue bonds over three to five years to restructure most of an estimated Rmb14tn in “hidden” or “implicit” debts, finance minister Lan Fo’an said in a rare press briefing at the Great Hall of the People in Beijing.
Thousands of off-balance sheet finance vehicles mostly hold these debts that local governments use to invest in infrastructure and property-related sectors. Many of these bets went sour when China’s real estate market entered a deep slowdown three years ago, sinking local government finances and undermining the broader economy.
“There is a sense of disappointment in markets — yields are lower, and the yuan is weaker,” said Mitul Kotecha, head of emerging market macro strategy for Asia at Barclays, of the fiscal package. China’s renminbi was down 0.3 percent at less than Rmb7.16 to the dollar on Friday afternoon.
On Thursday, the country’s central bank set its daily fix for the currency at its lowest level in a year, at Rmb7.166, as the dollar surged following Trump’s victory. Lan said Beijing would authorize local governments to issue Rmb6tn in new bonds over three years for the debt restructuring and reallocate a further Rmb4tn in previously planned bonds over five years for the same purpose. Finance minister Lan Fo’an told a rare press conference that officials were ‘studying’ further stimulus measures.
Local governments could swap these bonds for those of their finance vehicles, bringing the debts onto their balance sheets. Lan said this would lead to lower financing costs, saving Rmb600bn in total. Lan estimated that “hidden debts” would be reduced to Rmb2.3tn once the swaps and another debt program related to slum redevelopment were in place.
Unconstraining the Debt Problem
He said this would free up resources previously “constrained” by the debt problems and allow local governments to refocus spending on “development and public welfare improvement.” Lan said that, regarding additional stimulus measures, officials were “studying” extra steps to recapitalize big banks, buy unfinished properties, and strengthen consumption.
“We are planning the next phase of fiscal policy and are intensifying countercyclical adjustments,” the finance minister said. However, analysts say China needs to urgently deal with other problems dogging its domestic economy, including the housing slump before a 60 percent increase in tariffs threatened by Trump during the US election hit its exports.
Analysts said that if fully implemented without Chinese countermeasures, the Trump tariffs could knock several percentage points off China’s GDP at a moment when the economy was highly vulnerable. “There has been such a build-up in this NPC meeting that the expectations were pretty high,” said Barclays’ Kotecha. He suggested that Beijing was keeping some powder dry to be able to respond to potential tariffs from Trump and might announce more measures further down the line.
“But the expectation is unrealistic because the policy goal is to achieve the GDP growth target and reduce tail risks, not to reflate the economy in any meaningful way,” he said. Beijing’s stimulus efforts became more urgent in September after it was made clear that third-quarter GDP growth, which came in at 4.6 percent yearly, was set to miss the official annual target of 5 percent.
