San Francisco Frontiers - China unveils sweeping local govt debt swap to lift ailing economy

Local governments in China face a ballooning debt burden of $5.6 trillion, according to Beijing, raising worries about wider 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 to other creditors.

The move would raise "the local government debt limit by six trillion yuan, which will be used to replace existing hidden debts, freeing up space for local governments to better develop the economy and protect people's livelihood," state broadcaster CCTV said.

The move was taken after "fully considering the international and domestic development environment, ensuring the smooth operation of the economy and finance," finance minister Lan Fo'an told a press conference in Beijing.

"Since the beginning of this year, some new situations and problems have arisen in economic operations," he admitted.

The debt ceiling will be raised every year from 2024 to 2026 "to support local governments in replacing all kinds of hidden debt", he said.

A total of $558 billion of "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 government financial resources", he added.

Lawmakers also approved a new energy law to promote carbon neutrality" as Beijing moves ahead with its pledge to decarbonise its economy by 2060.

Zhiwei Zhang, President and Chief Economist at Pinpoint Asset Management said the debt swap "is an important policy measure which helps local government to alleviate their debt burden".

"This is expected by the market, but nonetheless the confirmation of such policy is positive," he said.

- Taking stock of Trump -

Officials were this week keeping close tabs on the US vote as they gathered in the Chinese capital for a meeting of the country's top lawmaking body.

Trump promised during his campaign of punishing tariffs on Chinese goods that threaten further grief for the world's second-largest economy, which is already grappling with a prolonged housing crisis and sluggish consumption.

Observers say Beijing could seek to cushion that blow with a long-awaited "bazooka stimulus" for the economy -- though caution details might still take time.

This week's meeting, originally scheduled for late October, was likely pushed back to allow "policymakers a chance to address a possible Trump win", Lynn Song, chief economist for Greater China at ING, said.

"In our view, the odds for a larger policy support package will rise somewhat with a Trump victory," he added.

Trump's victory is "not necessarily bad for China as this may 'pressure' Beijing for a bigger stimulus", Qi Wang, CIO of UOB Kay Hian Wealth Management, said on X.

Beijing began to unveil a raft of measures in September aimed at boosting economic activity, including rate cuts and the easing of some home purchasing restrictions, but analysts have bemoaned the lack of detail so far.

- 'Turning point' -

Trump's re-election provides a need for greater urgency, experts say, though caution may still prevail as officials try to avoid piling on more government debt.

"Any potential stimulus size may be bigger, but so is the pressure," Gary Ng, senior economist at Natixis, said.

"The market may still not get the economic boosters it wants," he warned.

In Beijing on Friday, people acknowledged recent woes but expressed cautious optimism about the future of the economy.

Han Xi, a 32-year-old man from Shanxi province in northern China, began a new auditing job in Beijing this week after resigning from his previous company in April.

"I have sent out resumes during this period, but you can see it takes more than half a year to get a new job," Han told AFP, adding that "many companies are laying off employees right now".

"But from a macroeconomic perspective, I'm generally optimistic," he added.

"Even though we're still in a downturn cycle, I think we are close to the turning point, though we haven't quite reached it yet."

V.Perez--SFF