China has introduced a substantial 10 trillion yuan ($1.4 trillion) plan to stabilise its struggling economy by helping local governments address their hidden debt burdens.
This initiative includes allowing regional authorities to swap out their “hidden debt,” primarily owed by risky local government financing platforms. These platforms, backed by cities and provinces, are commonly used for infrastructure and other development projects but carry substantial financial risks.
Finance Minister Lan Fo’an announced that the plan allows for a six trillion yuan ($838 billion) debt replacement cap over three years. This will help local governments manage their hidden debt more transparently, reducing financial stress on local authorities.
In addition, a separate four trillion yuan ($558 billion) quota will be allocated for special local bonds over five years, allowing for further debt reduction.
These efforts come at a time of economic slowdown driven by a post-pandemic financial strain and a crisis in the real estate sector.
Years of pandemic-related expenses and reduced tax revenues have depleted local government funds, leaving many regions struggling with debt.
This fiscal strain has grown severe, with some cities struggling to fund basic public services and facing increased default risks.
Lan reported that, by the end of 2023, China’s hidden debt reached a substantial 14.3 trillion yuan ($1.99 trillion), and officials plan to reduce this figure to 2.3 trillion yuan ($320 billion) by 2028.
The debt swap plan aims to support China in achieving its 2024 GDP growth target of around 5%. The economy expanded by 4.6% from July to September, slightly above economists' expectations but still a pace that risks missing the full-year target.
After implementing an initial stimulus package in late September, many experts anticipated further measures to counter persistent deflation and stimulate growth.
However, some economists, such as Larry Hu from Macquarie Bank, believe that this debt restructuring alone may not be enough to fully stimulate economic growth. He suggests that more aggressive policies would be necessary to reflate the economy and drive a sustained recovery.
This economic environment coincides with Donald Trump's potential return to the White House, which could bring further challenges for China. Trump's economic policies, including proposed tariffs, could impact trade and contribute to inflationary pressures that may complicate China's path to stable growth.
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