20 Nov 2024
The National People’s Congress Standing Committee, China’s top legislative body, approved a RMB12trn package, largely for debt swaps, on 8 November to help ease the local government debt burden. The local government debt ceiling will be raised by RMB6trn to replace existing hidden debt, earmarks RMB800bn of special local government bonds per year over the next five years for debt swaps and repays RMB2trn of hidden debt from shantytown renovation due from 2029. The plan should help local governments save on financing costs (estimated to save RMB600bn in interest costs over five years) and assist them to make overdue payments to contractors.
At first glance, the package might seem disappointing, as there are no specific measures to support domestic consumption or other areas of much-needed stimulus, such as real estate. However, the stimulus is not only sizable (c10% of GDP) but also reduces the debt burden, which can help free up more fiscal space to be used for productive investment. Indeed, the central government has set a firm deadline for local governments to resolve hidden debt, which is incurred outside the statutory government debt budget, by 2028. Over the past few years, the economic slowdown and housing correction have pressured local government finances, leading to a focus on debt repayment, which, in turn, creates further contractionary pressure on the economy. The large-scale debt swap should alleviate a liquidity crunch for local governments and the real economy, while long-term fiscal reforms may better align local government spending and resources, as stressed at the Third Plenum.
We view the local debt swap as only one part of the broader stimulus package, with additional fiscal support in focus for 2025. For example, the Finance Minister noted that policy measures to support the property sector and expand domestic demand are under consideration, while the Premier said that “there is a relatively large space for financial and monetary policies, and the policy tools are even more abundant” (Xinhua, 5 November). Although China is likely to meet its c5% growth target this year, domestic consumption remains subdued and external uncertainties are rising, given the US election results. Further announcements could be made at the Politburo meeting and the Central Economic Work Conference, often held by midDecember, though fiscal details are likely to be unveiled next March during the Two Sessions.
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