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China announced a $1.4 trillion support plan to save local governments struggling with debt and to boost the country’s economy. This plan came after smaller steps were taken to try to jumpstart growth, which was not sufficient to address China’s slow economic progress.
The decision to implement this massive plan was made by the Chinese government on Friday. As part of the plan, local governments were given permission to refinance their sizable debts, which had become unmanageable for some cities, leading to challenges in meeting financial obligations.
This move was the latest in a series of measures taken by China’s leadership since September to stimulate economic growth. With the recent election of Donald J. Trump as the President of the United States, the urgency to boost the Chinese economy grew even more pressing.
President Trump’s threats to impose hefty tariffs of up to 60% on Chinese goods raised concerns about potential trade tensions between the two largest economies in the world. In response, China needed to take bold steps to address its economic challenges.
Throughout this year, China has faced significant economic difficulties. The gradual decline of the real estate market, a key source of wealth for many Chinese families, resulted in reduced spending as people became cautious. Home prices have fallen by around 10% annually over the past three years, leading to a surge in foreclosures.
Moreover, local governments had accumulated substantial debt to fund infrastructure projects, exacerbating the economic challenges. This debt burden was further exacerbated by increased borrowing during the COVID-19 pandemic. Unlike the national government, which has limited public debt, local governments were heavily indebted due to their spending on development projects.
Despite the worsening economic situation, Chinese leaders had been slow to take decisive action to break the cycle of debt and economic stagnation. Beijing historically favored government-led growth over direct stimulus to consumers. However, in late September, the government introduced measures to make borrowing easier for individuals and businesses.
The Standing Committee of the National People’s Congress announced a plan that would allow the government to borrow an additional $838 billion over three years and $539 billion over the next five years. This plan aimed to help local governments refinance debts with high interest rates, enabling them to improve their liquidity. However, some experts had anticipated more significant tax cuts to support banks and the housing market.
While the debt swap was a crucial step, economists noted that it would only address a fraction of local government debts. A significant portion of the debt was hidden in off-the-books accounts, which were estimated to be worth $8.3 trillion according to the International Monetary Fund.
Victor Shih, a China expert from the University of California, San Diego, highlighted that regional government debt had doubled between 2018 and 2023. He mentioned that some local governments were struggling to pay workers’ salaries due to extensive debt burdens, which could have an adverse impact on consumer spending.
Despite the government’s claim that the plan would save local governments $84 billion over five years, critics argued that this amount was insufficient to address the root causes of the economic challenges. The previous debt relief measures in 2015 allowed local governments to refinance around $1.6 trillion over three years, but they failed to resolve the underlying debt issues.
Wang Tao, a top China economist at UBS, warned that the current measures did not tackle the core problems of local government debt. She noted that while the plan could alleviate short-term debt service payments, it did not provide a comprehensive solution to the debt crisis.
In September, the Chinese central bank implemented several measures to stimulate the economy, including lowering interest rates, easing mortgage requirements, and encouraging banks to lend more. These actions aimed to bolster consumer spending and boost the housing market.
As a result of these initiatives, Chinese towns facilitated home purchases to stimulate demand. The stock market, which had performed poorly before the stimulus measures, witnessed a significant upturn. The CSI 300 index, comprising leading companies, soared by over 20% following the central bank’s interventions on September 24.
However, the initial market response to the new stimulus measures was mixed, with Hong Kong stock prices declining after hours. While the economy met its growth targets of around 5%, economists like Larry Hu of Macquarie Group expressed the need for more substantial stimulus to boost the housing market and drive demand.
Looking ahead, the Central Economic Work Conference, scheduled for next month, could unveil further economic policies and additional stimulus measures. However, some experts cautioned that additional funding alone might not address the deep-seated structural issues requiring reform in China’s economy.
Despite the significant financial injection, critics like Victor Shih warned that merely postponing debt payments would not provide long-term solutions. He emphasized the importance of addressing systemic economic issues rather than resorting to short-term fixes.
In conclusion, China’s $1.4 trillion support plan reflects the government’s efforts to address mounting debt burdens and stimulate economic growth. While the measures have provided some relief, challenges persist, requiring comprehensive reforms to sustain long-term economic stability and prosperity.
