The support package came after smaller measures
were announced to jump-start growth. Economists said it was not big enough to
address China’s sluggish economy.
[ABS News Service/09.11.2024]
The Chinese government on Friday approved a $1.4
trillion plan to revive the economy, authorizing local governments to refinance
crushing debts that have left some cities unable to pay their bills.
The move caps a series of steps that China’s
leaders started rolling out in September to stimulate growth. The effort took
on greater urgency this week with the election of Donald J. Trump as president
of the United States.
Mr. Trump has promised to put additional tariffs as
high as 60 percent on Chinese goods imported by the United States, a policy
shift that could draw sharp retaliation by China and escalate already tense
relations between the world’s two largest economies.
China’s economy has struggled to regain momentum
this year. The grinding collapse of the real estate market, where most Chinese
households build their wealth, has depressed prices and left consumers
reluctant to spend. Home prices have fallen about 10 percent a year for the
past three years, and foreclosures are soaring.
At the same time, local governments have piled up
unsustainable levels of debt. For years, they drove growth by borrowing
enormous sums to pay for infrastructure projects. Then they took on even more
of debt during the Covid-19 pandemic. China’s central government has relatively
low levels of public debt because much of spending is largely funneled through cities and provinces.
Despite the mounting economic problems, China’s top
leaders had held back from taking significant steps to break the cycle. Beijing
has historically favored state-led growth rather than
direct consumer stimulus. In late September, however, the government took
action and made it easier for households and companies to borrow.
The plan announced Friday by the Standing Committee
of the National People’s Congress will allow additional government borrowing of
about $838 billion over three years and another $539 billion over five years.
Local governments will be able to free up cash by refinancing their
highest-interest debts. Some analysts had expected a more robust package of
fiscal relief for banks and the housing sector.
The debt swap, although substantial, will alleviate
only a fraction of the debt attributed to China’s local governments, economists
said.
A large portion of that debt is held in special
financial vehicles that keep it off official public budgets. The International
Monetary Fund estimated last year that such hidden debt added up to $8.3
trillion.
The debt level of most provincial governments
doubled from 2018 to 2023, said Victor Shih, a specialist in Chinese politics
and finance at the University of California, San Diego.
Over the past few years, some indebted local
governments have fallen behind on paying the wages of city and county level
employees. Getting these workers their salaries would help get middle-class
people spending again, Mr. Shih said.
But the measures announced Friday, which officials
said would save local governments about $84 billion over five years, are a
comparatively small sum, Mr. Shih said. “It’s an accounting exercise,” he said.
“It does nothing for the real economy.”
The last time the Chinese government stepped in to
relieve the debt burden of local governments was in 2015, when it allowed
refinancing of about $1.6 trillion over three years.
The current steps do not address the underlying
problem, said Wang Tao, chief China economist at UBS, a Swiss bank.
“It does help to significantly reduce the debt
service payment issue in the next few years, but does not solve the local
government debt issue,” Ms. Wang said.
In September, China’s central bank cut short-term
interest rates and rates on existing mortgages, reduced minimum down payments
for housing purchases and freed the country’s state-controlled commercial banks
to lend more, including to promote stock purchases.
Dozens of Chinese cities have relaxed restrictions
on home buying in recent months in a bid to get more people to buy.
One of the most tangible effects so far of the stimulus
push has been a rally in China’s stock markets, which had been among the worst
performing in the world before the recent turnabout. Since the central bank’s
first moves on Sept. 24, the CSI 300, an index of big companies that trade in
Shanghai and Shenzhen, has jumped more than 20 percent.
But the initial market reaction to the latest
stimulus measures suggested some disappointment among investors, with stocks in
Hong Kong falling in after-hours trading.
The government’s actions in recent weeks will help
the economy hit the growth target of around 5 percent, but will not
reinvigorate demand in the housing market, said Larry Hu, chief China economist
for Macquarie Group, an Australian financial services firm. “For that purpose,
we need a more sizable stimulus,” he said.
More funding could be announced after the Central
Economic Work Conference, an annual meeting expected to be held next month to
set economic policy. But more money will not address the fundamental
restructuring that some economists say is what the economy really needs.
“Even though this is a large amount of money, it is
still basically kicking the can down the road,” Mr. Shih said.