China announces massive debt swap to bail out local governments

Beijing says local governments in China are facing a ballooning debt burden of $5.6 trillion, raising concerns about overall economic stability.

The International Monetary Fund (IMF) put the figure at $8.4 trillion last year.

Policymakers gathered in Beijing this week voted to swap their hidden debts – defined as borrowing for which a government is liable but which is not disclosed to its citizens or other creditors.

The move would “raise the debt limit of local governments by six trillion yuan, which will be used to replace existing hidden debts and create space for local governments to better develop the economy and protect people’s livelihoods,” state broadcaster CCTV said.

The move came after “fully taking into account the international and domestic development environment to ensure the smooth functioning of the economy and finance,” Finance Minister Lan Fo’an said at a news conference in Beijing.

“Since the beginning of this year, some new situations and problems have arisen in business operations,” he admitted.

The debt ceiling will be raised every year from 2024 to 2026 “to help local governments replace all kinds of hidden debt,” he said.

A total of $558 billion in “hidden debt can be replaced,” Lan explained.

And $112 billion “will be arranged from new local government special bonds every year for five consecutive years to supplement the government’s financial resources,” he added.

Lawmakers also passed a new energy law “promoting carbon neutrality” as Beijing delivers on its pledge to decarbonize its economy by 2060.

Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, said the debt swap is “an important policy measure that helps local governments ease their debt burden.”

“This is expected by the market, but nevertheless the confirmation of this policy is positive,” he said.

Taking stock of Trump

Officials were closely watching the U.S. vote this week as they gathered in the Chinese capital for a meeting of the country’s top legislative body.

Trump promised punitive tariffs on Chinese goods during his campaign that would cause further distress to the world’s second-largest economy, which is already struggling with a prolonged housing crisis and sluggish consumption.

Observers say Beijing may try to cushion the blow with a long-awaited “bazooka stimulus” to the economy – although cautious details may be yet to emerge.

This week’s meeting, originally scheduled for late October, was likely postponed to “give policymakers a chance to reflect on a possible Trump victory,” said Lynn Song, chief Greater China economist at ING.

“In our view, the chances of a larger political support package will increase somewhat with a Trump victory,” he added.

Trump’s victory is “not necessarily bad for China as it could pressure Beijing for a larger stimulus package,” Qi Wang, CIO of UOB Kay Hian Wealth Management, said on X.

Beijing began unveiling a series of measures in September to boost economic activity, including cutting interest rates and easing some restrictions on home purchases. However, analysts have complained about the lack of details so far.

‘turning point’

Experts say re-electing Trump requires greater urgency, although caution remains necessary as officials try to avoid further accumulation of national debt.

“Any potential stimulus size may be greater, but the pressure is also greater,” said Gary Ng, senior economist at Natixis.

“The market may still not be getting the economic stimulus it wants,” he warned.

On Friday, people in Beijing acknowledged recent problems but expressed cautious optimism about the future of the economy.

Han Xi, a 32-year-old man from Shanxi Province in northern China, started a new job as an auditor in Beijing this week after resigning from his previous company in April.

“I sent out resumes during this time, but you can see that it takes more than half a year to get a new job,” Han told AFP, adding that “many companies are currently laying off employees.”

“But from a macroeconomic perspective, I am fundamentally optimistic,” he added.

“Even though we are still in a down cycle, I think we are close to the tipping point, even if we are not quite there yet.”