Link Securities | Last Friday, as reported by CNBC, Chinese authorities announced that the central government will allocate an additional CN¥6 trillion ($840 billion) to local governments to address hidden debt problems. The programme will take effect this year and run until the end of 2026, China’s finance minister Lan Fo’an told reporters.
The aid will be spread over about CN¥2 trillion a year. Lan added that starting this year, the central authorities will issue CN¥800 billion a year in special local government bonds for five years, totalling CN¥4 trillion. The policies would reduce hidden debt from CN¥14.3 trillion to CN¥2.3 trillion by 2028, Lan said.
Raising municipalities’ debt limit will increase their spending room as land sales, the traditional source of local government revenue, have stagnated amid the country’s economic crisis. However, the measures refrained from creating a new fiscal stimulus aimed specifically at consumption growth among Chinese consumers and producers. Nonetheless, the authorities signalled that more economic support could be forthcoming next year.
Assessment: While China was expected to announce more stimulus after its parliament ended a five-day meeting, investors were betting on more direct rate support to stimulate domestic demand. For the time being, the aid seems likely to be aimed at strengthening local government balance sheets, thereby reducing their high debt. Chinese stock markets initially reacted negatively to the aid, as did European stock markets in the sectors most exposed to this market, such as luxury goods and automobiles.
