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Is China's ¥6 Trillions Debt Relief Sufficient? ¥150 Trillion Says No

Last Friday in China, a ¥10 trillion debt restructuring plan was approved, shedding light on the government’s approach to fiscal strategy. This decision was reached during the 12th session of the National People’s Congress Standing Committee, which wrapped up on November 8. In addition to this plan, several laws were passed, including the Preschool Education Law and amendments to the Cultural Relics Protection Law, Property Law, Energy Resources Law, and the Anti-Money Laundering Law.

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The most widely discussed aspect of the session was the raised debt limit for local governments aimed at addressing “hidden” debts.

Three key measures were adopted:

A ¥6 trillion debt limit was established to restructure existing local government “hidden debts.”

Starting in 2024, ¥800 billion will be allocated annually over five years from special local government bonds to further address these debts, totaling an additional ¥4 trillion.

Debts maturing in 2029 or later, mostly from older redevelopment projects, will be repaid as per their original terms, adding another ¥2 trillion to the tally.

Together, these measures are projected to cover ¥10 trillion in “hidden” local debts.

Finance Minister Lan Fo'an announced that by 2028, local government debt would be reduced from the current ¥14.3 trillion to around ¥2.3 trillion, substantially relieving debt pressure. Lan argued that Chinese local governments should be able to reduce debts on their own.

He noted that restructuring from “hidden” debts to formal bonds, with lower interest rates, could save up to ¥600 billion in interest over five years. Lan also highlighted that China’s debt-to-GDP ratio, at 85%, remains lower than other major economies like the G20 average of 118% and the G7’s 123%.

However, critics argue the debt data is incomplete. When all debts, including local government bonds and implicit debts through investment platforms, are added up, the actual debt burden could reach ¥150 trillion—almost double the official figure. Some critics also point out ongoing local government financial struggles, including unpaid wages for civil servants and aggressive enforcement actions aimed at boosting revenues, which are reportedly harming local economies.

At the end of the press conference, a reporter from the Economic Daily asked Finance Minister Lan Fo'an what steps the Ministry of Finance is taking to achieve fiscal balance this year. Lan admitted that due to various factors, fiscal revenues for both central and local governments have fallen short of expectations. He mentioned that, while they are implementing a series of measures, he didn’t specify what these were. Lan then highlighted October’s general budget revenue, citing an increase to ¥1.07 trillion, up by 7.9% year-on-year—a jump from September’s 2.4% growth. Additionally, he said that ¥400 billion of local government debt settlement quota is being used to strengthen local financial capacity, reassuring that ample policy tools and resources are available to maintain balanced fiscal revenues and expenditures.

However, critics have observed that Lan’s remarks sidestepped essential points. Nationwide public budget revenue from January to September 2024 stood at ¥16.3 trillion, down by 2.2% year-on-year, with tax revenue declining by 5.3%. Lan’s emphasis on October’s slight rebound in central government revenue missed the broader trend of declining national revenue, leading to disappointment in economic and financial circles. Many had anticipated a substantial fiscal stimulus to boost the economy, but it fell short.

The Wall Street Journal reported that while China approved a ¥6 trillion local government special debt issuance, no broader fiscal measures were introduced. For weeks, investors and economists had expected a series of fiscal stimulus policies amid a weak real estate sector, waning consumer confidence, and slower economic growth. Reports from various government departments had fueled hopes for an economic stimulus, yet officials provided no concrete numbers or actions at this press event. The response? Disappointment.

In reality, the main announcement was a decision by the National People’s Congress Standing Committee to increase local government debt limits, specifically to restructure existing “hidden” debts. There were no mentions of special sovereign bonds to bolster bank capital, no new funds to support the real estate sector, and no additional fiscal stimulus initiatives. In short, the hidden debt swap plan, not economic stimulus, was the real focus.

The reason for this debt restructuring is to address the “immobilization” of local governments, many of which are heavily indebted and struggling to operate. Provinces can still function to a degree, but many city-level governments are financially strained, barely able to meet basic obligations like civil servant salaries and essential services—known as the "three guarantees": ensuring basic livelihood, salary payments, and basic operations. For some local governments, even these basics are now difficult to maintain.

This ¥10 trillion debt restructuring essentially moves immediate debts further down the timeline, allowing local governments some financial breathing room to sustain operations without direct central government funding. This approach may stave off immediate fiscal crises but does little to actively stimulate the economy, revealing the true intent behind this so-called "debt restructuring" policy.

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