China is preparing to issue a significant amount of new debt in an effort to boost its sagging economy and address the mounting financial burdens faced by local governments. According to a report by Caixin Global, the country may raise as much as 6 trillion yuan ($850 billion) over the next three years through special treasury bonds. This figure, while substantial, has failed to generate much excitement among investors, who are increasingly concerned about the effectiveness of China's stimulus measures.
The plan, which could be rolled out in stages through 2027, is part of a broader initiative by Beijing to stabilize growth and support local governments weighed down by off-balance-sheet debt. Much of this debt, which is held by local government financing vehicles (LGFVs), has been used to finance long-term infrastructure projects but has left local authorities with little room to maneuver financially.
Finance Minister Lan Fo'an confirmed on Saturday that Beijing would "significantly increase" its debt issuance to stimulate the economy. However, the lack of specific details regarding the scale and timing of the fiscal measures left many investors underwhelmed. Chinese stocks reflected this disappointment, with the CSI 300 Index falling 2.6% following the report. The proposed debt issuance comes as China grapples with a slowing economy, worsened by a downturn in its critical property sector and weaker-than-expected trade data.
"This is in line with our expectations," said Xing Zhaopeng, senior China strategist at ANZ. "For next year, we still think a growth target of around 5% is likely to be maintained. So, for a 5% growth rate, that should be enough." The government's roughly 5% growth target for 2023 is still within reach, but recent economic data has raised concerns that China may struggle to meet this goal without significant fiscal intervention.
The proposed 6 trillion yuan package is part of Beijing's multi-pronged approach to stabilize its economy, which has been hit hard by a property crisis that began in 2021. The real estate sector, once a major driver of local government revenues through land auctions, has seen a dramatic decline, leading to shrinking budgets for local authorities. The special bonds issued under this plan would help local governments refinance their debts at lower interest rates, freeing up funds for other essential expenditures.
However, investors remain cautious, with some questioning whether this level of borrowing will be sufficient to address the structural challenges facing the world's second-largest economy. David Qu, China economist at Bloomberg Economics, noted that "it wouldn't be enough" to solve the debt crisis, considering the housing sector's continued struggles. "Local governments will need more than 6 trillion yuan to deal with their 'hidden' debt," Qu said, emphasizing the sheer scale of the financial challenges at hand.
The property sector crisis has exacerbated China's broader economic slowdown, with consumer and business activity both declining. Local governments, once flush with cash from land sales to real estate developers, are now grappling with significant revenue shortfalls. Many are struggling to meet even basic expenses, with some forced to delay payments to contractors and employees.
Economists, including Bruce Pang, chief China economist at Jones Lang LaSalle, see the 6 trillion yuan debt plan as a stabilizing measure for the near term. "The probability of reaching a growth rate of about 5% at least in 2024 and 2025 would increase a lot," Pang said. However, longer-term growth remains uncertain, especially if external demand weakens or global trade tensions rise.
The looming debt package comes amid growing concerns about China's overall debt burden, which includes both central and local government obligations. The International Monetary Fund (IMF) estimates that China's total public debt, including local government borrowing, now stands at approximately $16 trillion, or 116% of the country's gross domestic product (GDP). While China's central government debt is relatively low by international standards-about 24% of GDP-the country's local governments are heavily indebted, which has constrained their ability to invest in growth-promoting initiatives.
The debt plan also highlights Beijing's ongoing struggle to balance fiscal stimulus with financial stability. While the proposed bond issuance would help local governments address their immediate financial difficulties, it does little to resolve the underlying issues plaguing China's economy, including low consumer spending and overreliance on investment-driven growth. China's household spending remains low, accounting for just 40% of GDP, compared to a global average closer to 60%.
Local governments have been forced to rely on short-term borrowing to finance long-term projects, a practice that David Li Daokui, professor at Tsinghua University and government adviser, described as "irrational, even crazy." In a recent interview with Bloomberg Television, Li argued that a larger debt swap initiative, perhaps representing as much as 10% of GDP, would be necessary to stabilize the economy.
Yet, despite these challenges, some analysts remain optimistic that China's planned debt issuance could provide a much-needed boost to business confidence and economic activity. Lan Fo'an suggested that some of the proceeds from the special bonds could be used to purchase unsold homes, potentially easing the housing glut that has weighed on the property market. Additional funds could also be allocated to support state banks, replenish capital, and offer subsidies to low-income households.