China is contemplating a monumental plan that could allow local authorities to issue up to 6 trillion yuan ($853 billion) in bonds by 2027, primarily aimed at refinancing their off-balance-sheet debt. This bold initiative is a crucial component of the government’s strategy to stabilize the world’s second-largest economy.
Finance Minister Lan Fo’an announced on Saturday that this one-time debt swap would be the “largest in recent years,” enabling local governments to redirect resources toward economic development and enhance business confidence. Economists at UBS Group, including Wang Tao, predict that this effort could rival the substantial 12 trillion yuan program implemented from 2015 to 2018.
In addition to the debt swap, Lan indicated that local authorities would be permitted to use funds from special bonds to purchase unsold homes, addressing the pressing issue of housing inventory. This comes on the heels of Chinese leaders’ commitment to reverse the declining real estate market. However, specific details regarding the timing and amount of these loans remain vague. Unlike general bonds, these special bonds are restricted to public projects with returns.
Despite the ambitious plans, some economists believe the proposed 6 trillion yuan may not suffice. Referring to the previous debt-swap program, analysts argue that local governments may need even more funds to tackle their “hidden” debts, which have been exacerbated by the ongoing housing crisis.
This planned debt swap represents a significant official endorsement of using special local government bonds to address debt risks. By the end of September, China had already issued about 3.5 trillion yuan in new special local government bonds, or 90% of its annual quota, according to Bloomberg calculations.
David Li Daokui, a professor at Tsinghua University and government adviser, shared insights with Bloomberg Television, stating that a successful debt swap could enable local governments to settle delayed payments to businesses and employees, amounting to a potential economic stimulus equivalent to 10% of the nation’s gross domestic product.
However, local governments are facing a cash crunch, leading to a decline in expenditures on infrastructure from 41% of GDP to just 36%. “They’ve been relying on short-term debt to finance long-term infrastructure projects, which is both irrational and unsustainable,” Li noted.
Critics warn that merely shifting hidden debt onto local governments’ balance sheets might not suffice. Many economists, including Li, are advocating for the central government to assume greater borrowing responsibilities and increase its spending capacity. Currently, central government debt constitutes less than a quarter of China’s GDP, a relatively low figure by international standards.
Li predicts that significant increases in central government debt will occur by the end of this month, enabling the central government to support local governments more effectively. This move, he argues, could help realign the macro economy and stimulate the real sector back to growth.
As China navigates these challenging economic waters, the effectiveness of the proposed $853 billion debt swap remains to be seen. Will this bold plan be enough to rescue local governments and rejuvenate the economy?
