China unveils $1.4 trln local debt package but no direct stimulus
China on Friday unveiled a landmark 10 trillion yuan ($1.4 trillion) debt package aimed at alleviating the financial strain on local governments and stabilizing its faltering economy. The announcement comes amid growing pressures from both domestic challenges, including a severe property crisis, and the external risks posed by the re-election of U.S. President Donald Trump, whose protectionist policies are expected to exacerbate trade tensions.
The new measures, confirmed by China’s Finance Minister Lan Foan, mark a significant departure from China’s previous all-out stimulus strategies. Rather than directly injecting funds into the economy, the package focuses on repairing municipal balance sheets, with a goal of addressing local governments’ “hidden debts” — a euphemism for loans and off-balance-sheet liabilities accumulated by local government financing vehicles (LGFVs).
Lan stated that the government’s goal is to trim these hidden debts, which stood at 14.3 trillion yuan at the end of 2023, to 2.3 trillion yuan by 2028. The package includes a 6 trillion yuan increase in the debt quota for local governments over the next three years and an additional 4 trillion yuan in funds for municipalities to address existing debt over the next five years.
While the announcement was widely anticipated, analysts cautioned that it might not be enough to overcome China’s deepening economic challenges. Huang Xuefeng, research director at Shanghai Anfang Private Fund Co, described the package as “not huge” and noted that it did little to directly stimulate new economic activity. “The money is used to replace hidden debts, which means it doesn’t create new work flows, so the support to growth is not that direct,” Huang explained.
Local governments in China have faced severe financial pressures, exacerbated by the country’s ongoing property crisis, which has decimated key revenue sources such as residential land auctions and developer investments. As a result, many municipalities have resorted to cutting public sector wages and amassing debts with private companies, further tightening liquidity and fueling deflationary pressures.
China’s 2024 economic growth target of approximately 5% is at risk as local governments struggle to manage the fallout from these challenges. The longer-term outlook is further complicated by the prospect of rising tariffs from the U.S., with Trump signaling plans to implement tariffs of over 60% on Chinese goods. This could significantly impact Chinese manufacturers, who are already relocating operations to Southeast Asia and other regions in response to the growing trade tensions.
In response to these external pressures, the Chinese government has also moved to support its export sector. State media reported that China’s cabinet has approved an expansion of export credit insurance and pledged to provide additional support for trade firms in light of the increasing risks to international trade.
Despite the broader economic context, some analysts are cautious about the immediate impact of the announced debt package. Carlos Casanova, Asia senior economist at UBP, argued that the measures fell short of what was needed to address China’s deeper economic problems. “China needs a debt package of at least 23 trillion yuan to reduce the inventory of unsold homes and repay maturing LGFV debt,” Casanova said. “What was announced on Friday is likely to disappoint the market because China needs more.”
The measures also leave room for further fiscal stimulus down the line. Lan indicated that additional policies would be forthcoming to support state sector purchases of unsold apartments, reclaim undeveloped residential land from property developers, and replenish the capital of state-owned banks. However, no specifics were provided regarding the size or timing of these measures, which could provide a more direct boost to the economy.
The government has also signaled its intention to intensify support for manufacturing upgrades and expand consumer subsidies aimed at encouraging purchases of household goods and appliances. Despite these efforts, economists remain skeptical that substantial fiscal stimulus aimed at boosting consumption will materialize anytime soon.
Xing Zhaopeng, senior China strategist at ANZ, noted that Beijing’s caution in deploying fiscal stimulus could be linked to uncertainty surrounding the incoming Trump administration. “The lack of direct fiscal stimulus suggests that policymakers are leaving room for the impact of Trump 2.0,” he said.
With household spending in China still significantly below the global average, many economists argue that stronger measures to stimulate consumption will be essential to reviving growth. However, UBP’s Casanova believes that Beijing may be waiting for clearer signals from Washington before unleashing more aggressive policies. “China is probably going to hold back some of that firepower until they have a better idea of what President Trump is planning,” he said.
As China navigates these economic challenges, the full impact of the new debt package remains to be seen, and the country’s growth trajectory will largely depend on both domestic policy decisions and the evolving external environment, particularly the trade relationship with the United States.
