China Unveils $1.4 Trillion Debt Relief to Boost Economy

China initiated a new round of fiscal measures on Friday to ease debt pressures on local governments and support its struggling economy. Finance Minister Lan Foan hinted at further stimulus measures in the near future.

The Chinese economy, the second-largest in the world, has faced significant challenges over the past year, including weak demand, deflationary trends, a property sector crisis, and financial strains on local governments. These issues are further complicated by the potential impact of U.S. President-elect Donald Trump, who has proposed high tariffs on Chinese goods.

Beijing announced that local governments could allocate 10 trillion yuan (about $1.4 trillion) to address off-balance-sheet, or “hidden,” debts, though there were no measures specifically aimed at boosting consumer demand, which some investors had anticipated. Local government debt quotas will increase by 6 trillion yuan, with an additional 4 trillion yuan in existing issuance approvals for debt restructuring, aiming to mitigate financial risks.

China’s top legislative body, the standing committee of the National People’s Congress, approved raising the limit on special bonds for local governments from 29.52 trillion to 35.52 trillion yuan. However, some analysts, like Huang Xuefeng from Shanghai Anfang Private Fund Co, felt the support was limited, noting that the funds mainly serve to replace existing debt rather than generate direct economic growth.

The debt restructuring, which had been anticipated in a recent Reuters report, is intended to address local debt risks, as noted by Xu Hongcai, vice chairman of the NPC’s financial and economic affairs committee. Finance Minister Lan also mentioned additional policies to support state purchases of unsold apartments, recover undeveloped residential land, and reinforce the capital of major state banks, though details were not provided.

In September, larger-than-expected monetary stimulus led to significant investor interest, and some speculated that a major fiscal program could be forthcoming. However, these current debt swaps are intended more to stabilize than to directly stimulate growth, as China grapples with a legacy of debt left from prior rounds of stimulus dating back to the 2008-2009 global crisis.

This hidden debt, largely accumulated by local government financing vehicles (LGFVs) for critical infrastructure projects, now restricts funding for new initiatives needed to boost economic activity. Lan noted that local government “hidden debt” was 14.3 trillion yuan at the end of 2023, with plans to reduce it to 2.3 trillion yuan by 2028.

The IMF estimates LGFV debt at 60 trillion yuan, or roughly 47.6% of GDP, at the end of 2023. The planned debt swaps could save local governments 600 billion yuan in interest over five years. However, LGFV debt—including loans, bonds, and shadow credits—is viewed as an increasing systemic risk in China’s financial system, especially as economic growth slows. According to the IMF, combined central and local government debt reached 147 trillion yuan at the end of 2023, amounting to 117% of GDP.