China's $1.4 Trillion Debt Package: Key Insights You Need to Know

Photo : Reuters

On Friday, China announced a massive 10 trillion yuan ($1.4 trillion) debt package aimed at easing local government financing strains and stabilizing the country’s weakening economic growth. However, officials stopped short of unveiling any direct economic stimulus measures, focusing instead on a strategy designed to address long-standing fiscal issues.

Key Details of the Plan

As part of this plan, the Chinese government increased the amount of debt local governments are allowed to raise through special bonds by 6 trillion yuan ($836 billion) over the next three years. This move effectively raises the special bond quota for local governments to 35.52 trillion yuan, pushing their overall debt ceiling to 52.79 trillion yuan. At the end of 2023, local government debt under official quotas stood at 40.74 trillion yuan, according to finance ministry data.

The newly allocated funds will primarily be used to repay the debt accumulated by local governments through financing vehicles known as Local Government Financing Vehicles (LGFVs). These vehicles have long been used by local authorities to bypass official debt limits, accumulating what Beijing refers to as “hidden debt.” This debt swap is seen as an effort to bring more transparency and control to local government borrowing.

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Additionally, local governments will be permitted to issue 800 billion yuan per year in debt for the next five years. This money is also intended for repaying the loans, bonds, and other shadow credits associated with LGFVs.

The Chinese government has also pledged to investigate and hold accountable local officials responsible for reckless borrowing practices. Authorities are set to accelerate reforms related to LGFVs to improve oversight and control over local government debt.

The Impact of the Debt Package

Local governments in China have been grappling with severe financial strains in recent years, largely driven by a slump in revenue from land auctions and property sales—two major sources of income for cities and provinces. The decline in revenue, particularly since the onset of China’s property crisis in 2021, has left many local governments unable to meet their financial obligations. This has led to cuts in civil servants’ salaries, delayed payments to contractors, and a significant slowdown in investments, all of which have further weakened the economy and contributed to deflationary pressures.

By swapping hidden debt for official debt, the Chinese government estimates that it will save local authorities approximately 600 billion yuan in interest payments over the next five years. In addition, freeing up money for principal repayments will help reduce the cost-cutting pressures faced by these governments. At the end of 2023, China’s official figures indicated that the total amount of hidden debt stood at 14.3 trillion yuan. The goal is to reduce this figure to 2.3 trillion yuan by 2028, with 2 trillion yuan of past debts tied to shantytown renovation programs to be repaid by 2029.

However, the International Monetary Fund (IMF) has estimated that the total LGFV debt was closer to 60 trillion yuan by the end of 2023, equivalent to 47.6% of China’s Gross Domestic Product (GDP), pointing to the massive scale of the issue.

No Immediate Economic Stimulus

Although the debt swap program is expected to inject liquidity into the real economy, it marks a shift from the approach taken during previous economic slowdowns, when China implemented large-scale fiscal stimulus packages to fund infrastructure projects and urbanization efforts. These past stimulus measures were partly responsible for the soaring debt levels seen today, leading officials to adopt a more cautious approach this time around.

Despite the absence of direct stimulus measures, China’s Finance Minister, Lan Foan, assured the public on Friday that additional support would be forthcoming. The government plans to introduce measures aimed at reducing the massive inventory of unsold homes and repurchasing idle land from developers. Furthermore, there are plans to recapitalize major state-owned banks and expand subsidy schemes for factories upgrading their equipment. The government will also offer subsidies to consumers replacing old appliances and goods, though the details regarding the size and timing of these measures have not yet been revealed.

What’s Next?

Key policy meetings later this year may provide further clarity on China’s economic strategies. The Communist Party’s top decision-making body, the Politburo, is scheduled to meet at the end of this month, while the annual Central Economic Work Conference in December will likely offer further insights into the country’s economic plans for the upcoming year.

However, China’s economic challenges are expected to intensify in the coming months, especially with the potential return of former President Donald Trump to the White House. Trump has indicated that, if elected, he would impose tariffs as high as 60% on U.S. imports of Chinese goods, which would significantly impact China’s industrial sector.

As analysts have noted, the Chinese government may be reserving fiscal resources in preparation for the possibility of another round of trade tensions with the United States, signaling that more substantial economic measures may be on the horizon.

The 10 trillion yuan debt package is a critical component of China’s ongoing efforts to stabilize its economy, but the real question remains: Will this be enough to address the underlying structural issues that have plagued the country’s local governments and broader economy? Only time will tell.