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China recently announced a bold plan to save local governments from their mounting debt crisis with a $1.4-trillion support package. This move comes after a series of smaller steps failed to reignite growth in the world’s second-largest economy, prompting concerns among economists that China’s sluggish growth could worsen.
The massive support plan, unveiled by the Chinese government on Friday, aims to provide a lifeline to local governments struggling with heavy debt burdens, which have hampered their ability to meet financial obligations. This plan marks the culmination of efforts initiated by China’s leadership back in September to boost economic growth. Amidst the backdrop of Donald J. Trump’s election as president of the United States, the urgency to revitalize China’s economy has intensified.
The looming threat of additional tariffs on Chinese goods, as promised by President Trump, has added fuel to the fire. A potential trade war between the US and China could further exacerbate economic woes, underscoring the critical need for China to shore up its economy and reduce its vulnerability to external shocks.
China’s economy has been grappling with headwinds this year, including a slowdown in the real estate market – a key driver of wealth accumulation for many Chinese households. Declining property prices, coupled with soaring foreclosure rates, have dampened consumer confidence and spending, contributing to the overall economic malaise. At the same time, local governments have amassed staggering levels of debt, stemming from years of borrowing to fund infrastructure projects and exacerbated by the economic fallout from the COVID-19 pandemic.
Despite the mounting economic challenges, Chinese authorities had been slow to implement decisive measures to address the structural issues plaguing the economy. Historically, China has favored government-led growth over direct stimulus measures targeting consumers. However, in a departure from this approach, the government initiated policy changes in September to facilitate increased lending to individuals and businesses.
The recent announcement by the Standing Committee of the National People’s Congress outlines a multi-pronged approach to address the debt crisis, allowing local governments to refinance their debts and inject much-needed liquidity into the economy. The plan involves raising additional funds totaling $838 billion over three years and an additional $539 billion over five years. By enabling local governments to restructure their debt at lower interest rates, the government aims to alleviate financial strains and stimulate economic activity.
While the debt swap initiative is a significant step in the right direction, economists caution that it may only scratch the surface of China’s ballooning local government debt burden. A substantial portion of this debt remains hidden from public view, stored in off-balance-sheet accounts, and estimated to amount to trillions of dollars. The persistence of this hidden debt underscores the need for more comprehensive reforms to address the root causes of China’s fiscal challenges.
Victor Shih, a leading expert on Chinese finance and politics, highlights the magnitude of the debt problem, noting that regional government debt has doubled from 2018 to 2023. The implications of this debt crisis extend beyond economic consequences, affecting the livelihoods of workers employed by indebted local governments. Delays in salary payments and reduced public services reflect the human toll of the debt crisis, underscoring the urgency of finding lasting solutions.
The $84 billion in savings projected over five years under the current plan, while substantial, may fall short of addressing the systemic challenges facing China’s economy. Mr. Shih emphasizes the need for holistic reforms that go beyond mere financial engineering to spur sustainable economic growth and alleviate debt burdens on local governments.
Past efforts to alleviate local government debt, such as the 2015 refinancing program, have provided temporary relief but failed to tackle the underlying structural issues. Wang Tao, a prominent China economist at UBS, highlights the need for a more comprehensive approach that addresses the root causes of local government debt and fosters sustainable economic growth.
China’s central bank has implemented a series of monetary policy measures, including interest rate cuts and mortgage incentives, to stimulate economic activity and encourage consumer spending. These measures, coupled with efforts to boost housing market liquidity and stock market investments, have shown some positive outcomes but have yet to provide a lasting solution to China’s economic woes.
The recent uptick in China’s stock markets following the stimulus package announcement reflects investor optimism but also underscores the fragility of the economic recovery. Despite short-term gains, structural challenges persist, requiring a deeper and more sustained approach to economic revitalization.
Looking ahead, China faces a critical juncture as it navigates the complex web of economic challenges and external pressures. The upcoming Central Economic Work Conference will offer insights into additional policy measures and the government’s long-term economic vision. While immediate stimulus measures may provide a temporary boost, the need for far-reaching reforms and sustainable growth strategies remains paramount.
In conclusion, China’s $1.4-trillion support plan represents a significant step towards addressing local government debt and revitalizing the economy. However, the road ahead is fraught with challenges, requiring more profound structural reforms and comprehensive policy measures to steer China towards sustainable economic growth and financial stability. By leveraging a mix of monetary and fiscal policies, China can pave the way for a more resilient and dynamic economy that can weather external shocks and foster prosperity for its citizens.
