Earlier, China seemed to postpone the National People's Congress Standing Committee session until November 8, perhaps to wait on the U.S. election results before deciding how much debt to issue. President Xi likely wanted to see the outcome to determine the scale of debt issuance. But now that the Standing Committee has concluded and announced the fiscal debt issuance plan, the market was shocked by the lower-than-expected numbers.
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This isn’t just my impression—the market reaction confirms it. As soon as the debt issuance plan was revealed, the A50 index dropped, and the RMB weakened. Clearly, the issuance fell below market expectations. So, what’s the thinking behind this conservative debt issuance STRATEGY?
First, let’s look at the debt breakdown: some say it’s 12 trillion, others say 6 trillion. Actually, the plan presents three specific figures: 6 trillion, 4 trillion, and 2 trillion, each serving a different purpose. Here’s a breakdown:
6 Trillion: This is the additional local debt issuance limit from 2024 to 2026, allowing local governments to issue an extra 2 trillion each year, specifically for swapping hidden debts.
4 Trillion: Over the next five years, local governments can use 800 billion each year from their existing special debt quota to swap hidden debt. It’s important to note that this doesn’t raise the overall debt ceiling. The main difference here is that local governments don’t need to submit projects for central approval; they can use this for debt swaps directly.
2 Trillion: This amount addresses hidden debts related to shantytown renovation that mature from 2029 onward, which will still be repaid under original terms without converting into special debt.
In summary, the NPC only approved a 6 trillion yuan increase in new local debt, spread over three years—effectively just 2 trillion annually. The other amounts are modifications to existing debt usage, with no impact on the debt ceiling.
Comparing this to the rumored 10 trillion plan reported by Reuters—where it was said that Beijing might issue 6 trillion for debt swaps and an additional 4 trillion to help local governments purchase idle land and properties—this final figure is notably lower. Interestingly, despite a Trump election outcome, China’s debt issuance scale is actually less than anticipated.
What’s President Xi thinking here?
The second point worth noting is that this debt issuance is all local, not central, debt—an interesting twist. Why has the central government backed off from bailing out local debts? It seems that Xi’s stance on this issue has shifted multiple times. Initially, he was firm: “Let local governments handle their own debts; the central government won’t cover for them.” But then it became clear that leaving them on their own would lead to chaos; audit findings were riddled with violations. The central government then considered stepping in partially to rein in local governments’ aggressive spending. Now, however, there’s been another shift—he’s willing to give them extensions and allow them to manage debt with debt, avoiding immediate default risk, but he’s stopping short of bailing them out with central funds.
A third point: all these fiscal debt plans are purely for managing debt, reducing the burden on local governments, without a penny for growth. Not a cent for public services or even for shoring up the real estate sector. This almost seems like a message: “No plans to stimulate the economy this year.” Consumption, investment, real estate—none of them are getting extra funds. It seems like Beijing is taking a “hands-off” approach.
So, why the shift in debt issuance plans?
One reason could be the outcome of the U.S. election. With Trump back in office, Beijing may have pulled back from issuing additional debt. Two possibilities here: one, Beijing exaggerated the 10 trillion debt issuance plan reported to Reuters to boost market expectations without real intent to issue that much. Or two, the 10 trillion figure might include debt restructuring, making it sound larger. If we only count newly issued debt, it’s closer to 6 trillion, well below market expectations.
Let’s go a bit further: there might even be a third possibility. Perhaps Xi believes he can handle Trump’s trade war without a massive economic stimulus, potentially with help from Elon Musk. As a key figure in Trump’s circle now, Musk’s influence could be significant. With his favorable ties to China, Beijing may see him as a backchannel to ease trade tensions. But realistically, Musk can’t singlehandedly reset U.S.-China relations. Both sides are using each other: Musk needed Chinese support against pressures from Wall Street, and China needs Musk’s manufacturing, supply chain, and his symbolic role in U.S.-China relations. But Musk’s dependence on China is not as strong now, and his priorities are squarely American.
So, if China isn’t issuing massive fiscal support this year, it might be waiting for Trump’s tariff stance to solidify before committing resources. If tariffs don’t kick in until next year, we might even see a boost in exports as American importers stock up before the changes, which could help China hit its GDP targets without additional spending. This delay gives Beijing breathing room until next year.
Another question remains: why has Xi’s stance on local debt changed so much?
This year’s fiscal debt plan is entirely aimed at relieving local debt pressures by extending terms and lowering rates, helping local governments avoid cash flow issues that could lead to defaults. But this won’t solve the debt problem long-term. Beijing’s plan essentially acknowledges that local governments won’t be able to pay back their debt—it just keeps them afloat, preventing them from defaulting or creating social unrest. The central government won’t use its own debt to cover local shortfalls because it would be an endless burden. And, local governments’ over-spending and corruption have made them too costly to bail out completely.
If local governments ran out of cash and became desperate, they could disrupt the economy by seizing private funds, even bank deposits. So, keeping them stable—even if barely—is in everyone’s interest.
Finally, it’s also clear that the central government hasn’t found a way to make local governments profitable. Ideally, debt could fund profitable projects, but no such projects are available. Fixing this would require reforms in the fiscal system, but any changes here would impact Beijing’s revenue, so these are difficult to implement.
In summary, the fiscal debt plan signals a few things:
Xi is preparing for a long game. As soon as next year’s trade tensions escalate, additional debt issuance will likely support the economy, not local debt.
Beijing has low expectations for local governments. The best-case scenario is for them to stay stable without burdening the central government.
Beijing seems confident it can meet this year’s GDP target without extra stimulus. By holding onto its resources, it can be ready for next year’s trade battle.
The RMB may depreciate further, making USD or gold potentially safer holdings.
Export-related industries could face challenges next year, possibly leading to higher unemployment, so we might see continued pressure on consumption.
Social unrest could increase next year, stay cautious when investing in Chinese equities.
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