China has introduced its latest measures to boost economic growth. On the 8th, the Standing Committee of the National People’s Congress (NPC) of China reviewed and approved an increase in the local government debt limit by RMB 6 trillion. This amount is designated for swapping existing implicit debt, with an additional RMB 4 trillion in new local government special bonds to be used for the same purpose, totaling RMB 10 trillion (NTD 45 trillion). This represents the most significant effort in recent years to address local debt issues.
(Previous Context:
Trump’s election victory led to a significant depreciation of the RMB, the largest drop in four years, raising concerns about potential intervention by the Chinese central bank.)
(Background Supplement:
Arthur Hayes’ lengthy article: China’s ‘epic liquidity injection’ will eventually drive hot money to Bitcoin.)
According to Xinhua News Agency, the 12th meeting of the 14th National People’s Congress Standing Committee concluded in Beijing on the 8th, approving the “Proposal from the State Council to Review the Increase in the Local Government Debt Limit to Swap Existing Implicit Debt,” which increases the local government debt limit by RMB 6 trillion to replace existing implicit debt.
Xu Hongcai, Deputy Director of the NPC Financial and Economic Affairs Committee and Director of the Budgetary Affairs Commission of the NPC Standing Committee, introduced at a press conference that the proposal suggests that the entire increase in debt limit be allocated for project-based debt limits, approved once and implemented over three years. According to this plan, by the end of 2024, the local government project debt limit will increase from RMB 29.52 trillion to RMB 35.52 trillion.
Xu Hongcai stated that the proposal has been approved by the NPC Standing Committee. The State Council’s financial departments will allocate regional limits as early as possible according to procedures, local governments will lawfully manage the bond swaps, and people’s congresses and their standing committees at all levels will lawfully supervise the process.
An additional RMB 10 trillion in local debt resolution resources.
Moreover, China’s Minister of Finance, Lan Fo’an, stated at a press conference on the 8th that starting in 2024, China will allocate RMB 800 billion annually from new local government special bonds for debt resolution over five consecutive years, cumulatively replacing RMB 4 trillion in implicit debt.
Lan Fo’an further pointed out that, in addition to the RMB 6 trillion debt limit approved by the NPC Standing Committee, this directly increases local debt resolution resources by RMB 10 trillion (NTD 45 trillion). It is also clarified that RMB 2 trillion in implicit debt from shantytown renovations maturing in 2029 and beyond will be repaid under the original contract terms.
According to Lan Fo’an, after the policy coordination efforts, the total amount of implicit debt that needs to be resolved by local governments before 2028 will sharply decrease from RMB 14.3 trillion to RMB 2.3 trillion, significantly reducing the debt resolution pressure.
Lan Fo’an noted that the current scale of implicit debt in some regions is large, and the interest burden is heavy, posing not only the risk of default but also consuming local financial resources. This new debt resolution policy addresses the “urgent needs” of local governments, alleviating immediate debt resolution pressure and reducing interest expenditure.
Lan Fo’an mentioned that this swap, with RMB 8.4 trillion intensively arranged over the next three years, significantly reduces the scale of implicit debt that needs to be resolved by local governments in recent years, allowing them to shed burdens and move forward. Additionally, since the statutory debt interest rate is significantly lower than that of implicit debt, the swap will greatly save local interest expenses, with an estimated cumulative saving of about RMB 600 billion over five years.
Addressing New Risks of Economic Slowdown
Bloomberg reported that the aforementioned local government debt swap plan is one of the additional measures introduced by the Chinese government to address new risks of economic slowdown following Trump’s re-election. The related plan approved by the NPC Standing Committee approaches the upper limit predicted by most economists and marks the first time since 2015 that Chinese authorities have increased the local government debt ceiling mid-year.
China’s GDP growth in the third quarter was 4.6%, the slowest increase since March last year, casting doubt on whether China can achieve its annual growth target of approximately 5%. The economic slowdown has prompted policymakers to shift towards more supportive policies, including interest rate cuts and assistance to the stock and real estate markets.
The unexpected economic stimulus measures introduced by Chinese authorities in late September temporarily boosted Chinese stocks and prompted global investment banks, including Goldman Sachs, to raise their economic forecasts for China. However, following Trump’s election victory, calls for China to strengthen its policies and boost domestic demand have increased to counteract potential impacts on Chinese exports.
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