In the fight against the economic downturn, China wants to reduce the systemic risks of the weakening economy and target local government debt. This is because they often have high liabilities due to certain financing vehicles (LGFV). In the future, local governments will be able to use ten trillion yuan (around 1.3 trillion euros) to reduce these off-balance sheet or “hidden” debts and thus convert them into other debts, government representatives said on Friday after a week-long parliamentary session.
China’s top legislative body, the Standing Committee of the National People’s Congress (NPC), passed a bill to increase local government debt limits during a Nov. 4-8 meeting. The package is a necessary first step to promote debt restructuring at the local level, said LBBW analyst Sandro Pannagl. “However, contrary to general expectations, no new steps have been announced to address the current economic downturn or to support the real estate market.”
Authorities in China have ramped up measures since late September, including interest rate cuts, to boost the world’s second-largest economy after the United States. The government in Beijing is targeting economic growth of around five percent for 2024. However, the outlook could deteriorate further due to Donald Trump’s victory in the US presidential election. Because the Republican is threatening tariffs of over 60 percent on all Chinese goods. “In view of Trump’s approaching presidency, Beijing will probably want to exercise restraint for the time being before taking further steps,” said Pannagl.
As understandable as this strategy may be, there are already enough arguments to support the domestic economy, said the economist at Landesbank Baden-Württemberg. “Achieving this year’s growth target appears increasingly out of reach.”
Measures are intended to reduce debt risks at the local level
The debt ratio of local governments is to be increased by six trillion yuan. In addition, local governments can use an additional four trillion yuan from already approved issuances to finance debt conversions. Municipalities can then issue bonds to exchange for off-balance sheet or “hidden” debt, government officials said. This debt conversion is intended to resolve debt risks at the local level, said Xu Hongcai, vice chairman of the Finance and Economic Committee of the National People’s Congress, at a news conference in Beijing. The cap on the issuance of special bonds by local governments is to be raised from 29.52 trillion yuan to 35.52 trillion yuan.
Finance Minister Lan Foan emphasized that local governments’ “hidden debt” stood at 14.3 trillion yuan at the end of 2023 and is expected to be reduced to 2.3 trillion yuan by 2028. These so-called debt swaps are expected to save local governments 600 billion yuan in interest over five years. China has been struggling with the side effects of a large mountain of debt for a long time. These include “hidden debts” accumulated mainly by local government financing vehicles (LGFVs) and borrowed for infrastructure projects. However, this debt overhang leaves them little room to finance new projects to stimulate the weakening economy.
Finance Minister Lan also announced that the authorities would adopt measures to support the purchase of unsold housing by the state sector, reclaim vacant residential land from developers and increase the capital of major state-owned banks. However, Lan did not comment on the scope or timing of these steps.
