China’s $1.4 Trillion Debt Relief Falls Short of Investor Expectations

• China’s approval of $1.4 trillion to mitigate the receding economy and meet its GDP growth target has been met with disappointment. 
• The country is reported to have finished 2023 with a $1.99 trillion hidden debt balance; however, authorities are seeking to reduce the amount drastically by 2028. 

China has officially approved a $1.4 trillion plan to “save” its ailing economy through the unveiling of additional stimulus measures and permitting debt refinance by the local government to mitigate potential volatility amid the re-election of Donald Trump into the presidency. According to experts, this decision emphasizes repairing municipal balance sheets instead of injecting money into the economy directly.

Throwing light on this, Finance Minister Lan Fo’an stated on Friday, November 8, that borrowing capped at $838 billion would be permitted over three years to enable regional governments to replace their “hidden debt.” In his explanation, Lan disclosed that the local government would have the opportunity to separate a $558 billion quota, which is in the form of special local bonds over five years, as we recently reported.

Since the beginning of this year, affected by a variety of factors, the central and local government fiscal revenues have fallen short of expectations.

The Disappointment in this Fiscal Package

Explaining the recent announcement, chief Asia economist at Capital Economics Mark Williams highlighted that subjecting the local government debt to refinancing reduces interest cost while ensuring that resources to be spent elsewhere are freed up. Meanwhile, Williams believes that this would not make any substantial difference. According to him, the fiscal announcement is a gross disappointment for individuals and investors expecting an appreciable stimulus.

Agreeing to Williams’ position, the Managing Director of China Beige Book, Shehzadh Qazi also disclosed that this decision would not stimulate growth. Even if it does, the margin would not be meaningful to the market.

“I don’t think this does anything to actually stimulate growth, not at least in a way that’s going to be meaningful for markets,” says @shehzadhqazi of @ChinaBeigeBook on China’s new $1.4T stimulus package. pic.twitter.com/HNYU2M5ygG— Squawk Box (@SquawkCNBC) November 8, 2024

Research director at Shanghai Anfang Private Fund Co Huang Xuefeng expressed his disappointment as well:

I don’t see anything that exceeds expectations. It’s not huge if you look at the fiscal shortfalls. The money is used to replace hidden debts, which means it doesn’t create new workflows, so the support to growth is not that direct.

The Degree of Challenges Confronting China

According to experts, China’s years of tight pandemic restrictions and crisis in the real estate sector have left authorities across the country in debt. Lan hints that China’s hidden debt balance was around $1.99 trillion by the end of 2023. Meanwhile, authorities aim to reduce this amount to $320 billion by the end of 2028.

Looking further into the country’s economic woes, CNF discovered that China’s Gross Domestic Product (GDP) only managed a 4.6% growth in the third quarter of 2024 (Q3 2024). According to economists, Beijing may miss its 5% annual growth target at this rate. Meanwhile, the chief China economist at Macquarie Bank, Larry Hu, believes that the just-approved fiscal package is meant to achieve the GDP growth target.

It may be disappointing for those who were expecting the NPC meeting to approve a massive fiscal package. But the expectation is unrealistic because the policy goal is to achieve the GDP growth target and reduce tail risks, not to reflate the economy in any meaningful way.

Amid the backdrop of this, an international consulting management firm, Agile Dynamics, has disclosed that the wider use of blockchain and its related assets could increase the world’s GDP by $2.1 trillion by 2030.