China announces $1.4 trillion package to tackle "hidden" local government debt!
China announced on Friday that the central government will allocate an additional 6 trillion yuan ($840 billion) to local governments to deal with hidden debt issues. The program takes effect this year and will last until the end of 2026, China's Finance Minister Lan Fo'an told reporters. This comes down to about 2 trillion yuan a year.
Lan added that starting this year, central authorities will issue 800 billion yuan a year in special local government bonds for five years, for a total of 4 trillion yuan. The policies would reduce hidden debt from 14.3 trillion yuan to 2.3 trillion yuan by 2028, Lan said. Beijing was widely expected to unveil more stimulus after its parliament wrapped up a five-day meeting.
Authorities here have stepped up stimulus announcements since late September, prompting a rally in stocks. President Xi Jinping led a meeting on September 26, which called for strengthening fiscal and monetary support and halting the slump in the real estate market.
While the People's Bank of China has already cut some interest rates, large increases in government debt and spending require approval by the country's parliament, called the National People's Congress.
This approval can be given at the weekly meeting of the standing committee of the legislature. During a similar meeting in October last year, the authorities had approved a rare increase in China's deficit to 3.8%, from 3%, according to state media.
Analysts expect an increase in the rate of fiscal support after Donald Trump, who has threatened stiff tariffs on Chinese goods, won the US presidential election this week. But some are still cautious, warning that Beijing may remain conservative and not provide direct support to consumers.
When discussing the planned fiscal support at a press conference last month, Finance Minister Lan Fo'an emphasized the need to address local government debt problems.
In the parliamentary session so far, officials have considered a plan to raise the limit on how much debt local governments can issue, according to state media. The additional quota would go towards the exchange of the hidden debt of the local governments.
Nomura estimates that China has 50 trillion yuan to 60 trillion yuan ($7 trillion to $8.4 trillion) in such hidden debt, and expects Beijing to allow local authorities to increase debt issuance by 10 trillion yuan over several years. future. That could save local governments 300 billion yuan in interest payments a year, Nomura said.
In recent years, the decline of real estate in the country has drastically limited an important source of local government revenue. Regional authorities have also had to spend on Covid-19 controls during the pandemic.
Even before that, Chinese local government debt had risen to 22% of GDP by the end of 2019, far outstripping the increase in revenue available to pay that debt, according to an International Monetary Fund report.
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