China approves $1.4 trillion debt package in latest measure to boost flagging economy

By Juliana Liu, CNN

Hong Kong (CNN) — China has approved a 10 trillion yuan ($1.4 trillion) plan to bolster its ailing economy by allowing local governments to swap out their hidden debt, unveiling additional stimulus measures to counter a potentially volatile growth path marked by the impending return of Donald Trump to the White House.

Finance Minster Lan Fo’an told a Friday press conference the six trillion yuan ($838 billion) debt limit would be made available over three years to help regional governments replace their so-called “hidden debt.” This kind of debt is normally owed by risky local government financing platforms that are backed by cities or provinces.

Lan separately added that local governments will be given access to a separate four trillion yuan ($558 billion) quota in the form of special local bonds over five years, also with the aim of trimming their debt holdings. The announcement was made at the conclusion of a five-day meeting by China’s top legislative body, the Standing Committee of the National People’s Congress.

“Since the beginning of this year, affected by a variety of factors, the central and local fiscal revenues have fallen short of expectations,” Lan added.

Years of strict pandemic controls and a real estate crisis have drained local government coffers in China, leaving authorities across the country struggling with mountains of debt. The lack of money means governments have few resources to kick start economic growth.

The problem has gotten so extreme in some places that cities are now unable to provide basic services, and the risk of default is rising.

Lan revealed that, as of the end of 2023, China had an enormous hidden debt balance of 14.3 trillion yuan ($1.99 trillion). Officials aim to trim that amount to 2.3 trillion yuan ($320 billion) by 2028.

Hitting a growth target

The scale of the debt swap, seen as underwhelming by some investors, was largely in line with the expectations of economists.

“Local government debt swap means that either the central government or local governments will issue new bonds to repay the existing off-balance-sheet debt owed by local governments,” Larry Hu, chief China economist at Macquarie Bank, wrote ahead of the announcement. “The goal of stimulus is to achieve this year’s GDP growth target and reduce the tail risks. It could not meaningfully reflate the economy.”

Reflating the economy refers to measures aimed at stimulating growth and combating deflation, which has become a stubborn problem in China. Those efforts would require much more aggressive policies, far beyond debt swaps.

China’s gross domestic product (GDP) grew by just 4.6% in the three-month period from July to September, compared with a year ago. That was just slightly higher than the expectations of economists polled by Reuters, who had predicted expansion of 4.5%.

Still, at this pace of growth, there’s a risk Beijing may miss its growth target rate of around 5%. After a summer of dismal economic, leader Xi Jinping finally decided to go ahead with a much-needed stimulus package, mostly focused on monetary measures, in the last week of September.

Since then, economists have been expecting additional stimulus measures worth up to 10 trillion yuan ($1.4 trillion) to restore bullishness in the world’s second-largest economy.

This story has been updated with additional detail and context.

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