China Introduces New Measures to Promote Economic Growth
On the 8th, China’s National People’s Congress Standing Committee reviewed and approved an increase in the local government debt limit by RMB 6 trillion, aimed at swapping existing implicit debt. Additionally, it approved new local government special bonds that can swap implicit debt by RMB 4 trillion, totaling RMB 10 trillion (NTD 45 trillion), marking the most significant measure to resolve local debt in recent years.
(Background Summary:
Trump’s victory leads to the “sharp depreciation” of the RMB, the largest drop in four years, raising concerns about potential intervention by China’s central bank.)
(Supplementary Background:
Arthur Hayes’s lengthy article: China’s “epic liquidity injection” will eventually lead to hot money flowing into Bitcoin.)
According to a report by Xinhua News Agency, the 12th meeting of the 14th National People’s Congress Standing Committee concluded in Beijing on the 8th, approving the “State Council’s proposal to increase the local government debt limit to swap existing implicit debt.” This involves raising the local government debt limit by RMB 6 trillion to swap existing implicit debt.
Xu Hongcai, Deputy Director of the Financial and Economic Committee of the National People’s Congress and Director of the Budgetary Affairs Commission of the National People’s Congress Standing Committee, introduced at a press conference that the proposal suggests all newly added debt limits will be allocated as special project debt limits, approved once and implemented over three years. According to this arrangement, 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 National People’s Congress Standing Committee, and the Ministry of Finance will promptly allocate regional limits according to procedures. Local governments will legally carry out bond swaps, and people’s congresses at all levels and their standing committees will supervise the process according to the law.
New Local Debt Resolution Resources of RMB 10 Trillion
Additionally, China’s Minister of Finance, Lan Fo’an, stated at a press conference on the 8th that starting from 2024, China will allocate RMB 800 billion annually from newly issued local government special bonds for five consecutive years specifically for debt resolution, cumulatively able to swap implicit debt of RMB 4 trillion.
Lan Fo’an further pointed out that, combined with the RMB 6 trillion debt limit approved by the National People’s Congress Standing Committee, this directly increases local debt resolution resources by RMB 10 trillion (NTD 45 trillion). It also clarifies that implicit debt of RMB 2 trillion due in and after 2029 from shantytown renovation projects will still be repaid according to the original contracts.
According to Lan Fo’an, after the policy synergy, the total implicit debt that needs to be digested by local governments before 2028 will significantly decrease from RMB 14.3 trillion to RMB 2.3 trillion, greatly reducing the debt resolution pressure.
Lan Fo’an pointed out that currently, some regions have large implicit debt scales and heavy interest burdens, which not only pose risks of default but also consume local fiscal resources. This new debt resolution policy addresses the “urgent need” of local governments, alleviating current debt resolution pressure and reducing interest expenses.
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 local governments need to digest in recent years, allowing them to unload burdens and move forward more lightly. Moreover, as statutory debt interest rates are much lower than implicit debt rates, the swap will substantially save local interest expenses, with an estimated total saving of about RMB 600 billion over five years.
Addressing New Economic Slowdown Risks
Bloomberg reported that the aforementioned local government debt swap plan is one of the additional measures introduced by the Chinese government to address the new economic slowdown risks brought by Trump’s reelection. The related plan approved by the National People’s Congress Standing Committee approaches the upper limit predicted by most economists, and it is the first time since 2015 that Chinese authorities have raised the local government debt limit mid-year.
China’s GDP growth in the third quarter was 4.6%, the slowest increase since March last year, raising doubts about whether China can achieve its annual growth target of around 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.
In late September, China’s authorities introduced unexpectedly strong economic stimulus measures, which temporarily boosted the Chinese stock market and prompted global investment banks, including Goldman Sachs, to raise their economic forecasts for China. However, after Trump’s victory, there have been increased calls for China to strengthen policies and boost domestic demand to offset potential impacts on Chinese exports.
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