The Chinese government announced plans to invest a total of 12 trillion yuan (about 2,321 trillion won) in financial resources to resolve local government debt problems that are hindering economic recovery.
However, some are disappointed that no stimulus package was announced this time to address sluggish domestic demand and a slump in the real estate market, which are other obstacles to economic recovery.
China invests 12 trillion yuan to resolve local government’s ‘hidden debt’
On the 8th, the Standing Committee of the National People’s Congress (National People’s Congress), which is effectively China’s National Assembly, approved a plan to increase the local government debt limit by 6 trillion yuan (about 1,162 trillion won).
Lan Poan, China’s Minister of Finance, explained that the debt limit will be increased by 2 trillion yuan each year over three years from this year to 2026 to help it be used to refinance various ‘hidden debts’.
The Chinese government has previously announced that it will invest 800 billion yuan (about 155 trillion won) in local government special bonds every year starting this year, and a total of 4 trillion yuan (about 775 trillion won) over the next five years to repay hidden debts of local governments. .
In addition, Director Lan added that the repayment of 2 trillion yuan of hidden debt incurred during the reconstruction of slums, which expires after 2029, will be promoted as originally planned.
Director Lan said, “If these three policies work synergistically, the total hidden debt that needs to be resolved in local areas before 2028 will be reduced from 14.3 trillion yuan (about 2,770 trillion won) to 2.3 trillion yuan (about 445 trillion won), reducing debt pressure. “This will be greatly reduced,” he emphasized.
To sum up, a total of 12 trillion yuan (approximately 2,321 trillion won) will be allocated over the next few years, including the previously announced 4 trillion yuan repayment of local debt, 2 trillion yuan repayment of existing slum reconstruction-related debt, and 6 trillion yuan debt limit increase announced today. It is like being invested.
China’s Ministry of Finance explained that through this measure, local governments will be able to use the resources originally used to repay debt to improve people’s livelihoods, investment, consumption, and technological innovation.
Hidden debt is said to be up to 60 trillion yuan… “The market will be disappointed.”
The reason why the Chinese authorities decided to invest an astronomical amount of financial resources to solve the local government debt problem is because local government debt is snowballing and is holding back economic recovery.
Over the past dozen years, local governments have been pursuing large-scale infrastructure investments and, when they lack financial resources, they have established a special corporation, LGFV (Local Government Financing Vehicle), and this has become a hidden debt.
In addition, local government debt increased further as the central government passed on to local governments the costs necessary to maintain the zero-corona policy, such as the cost of gene amplification (PCR) testing during the COVID-19 outbreak.
According to the Ministry of Finance, local government ‘statutory debt’ is 40.7 trillion yuan (about 7,891 trillion won). Additionally, the Ministry of Finance estimates that the ‘hidden debt’ that needs to be repaid before 2028 is 14.3 trillion yuan (about 2,770 trillion won).
However, the prevailing view in the market is that the hidden debt of local governments is much larger than the Chinese government’s official figures.
Luo Zhiheng, chief economist at Wekai Securities, estimated hidden debt at 32.2 trillion yuan (about 6,237 trillion won) as of last June, and Goldman Sachs also estimated LGFV debt at 60 trillion yuan (about 1,620 trillion won) as of the end of 2022. I saw it.
Accordingly, Carlos Casanova, chief Asia economist at Swiss bank UPB, said in an interview with Reuters that the actual size of the stimulus package needed, considering the size of LGFV debt, is about 23 trillion yuan, and assessed the stimulus package as “going to disappoint the market.” did it
Where are the other stimulus measures?… There is also an expectation that “we will spend money again next year”
In addition, there were initially high expectations that the National People’s Congress Standing Committee meeting would present a detailed plan for various stimulus measures to revitalize stagnant real estate and domestic demand, but some expressed disappointment in that this time only measures to resolve local government debt were presented.
Reuters pointed out that “Manager Lan said additional economic stimulus measures are being prepared, but did not provide details,” adding, “Investors have been expecting additional measures to stimulate sluggish consumer and business demand.”
“Because (this stimulus) is used to replace hidden debt, the support for GDP growth is not that direct,” said Huang Xuefeng, research director at Anfang Private Fund. “It will not provide much of a boost to economic fundamentals.” “It is,” he said.
However, as uncertainty has increased following former President Donald Trump’s victory in the U.S. presidential election, some point out that there is no need to be too disappointed as the Chinese government will adjust the size of the stimulus package after watching the situation further.
“The most important message from this press conference is that Director Lan said he will introduce more fiscal policies next year,” said Zhang Zhiwei, chief economist at Pinpoint Asset. “This ‘forward guidance’ means that the Chinese government has already decided to increase the fiscal deficit next year. “It suggests that there is a possibility that a decision has been made,” he pointed out.
