China’s Economic Turmoil: Why Major Stimulus Measures Are Still on Hold

Speculation about significant economic stimulus measures in China has been replaced by a focus on managing local government debt. Finance Minister Lan Fo’an announced that the central government will assist local authorities in addressing their $13 trillion debt, including hidden liabilities of approximately $2 trillion. While strict oversight will be enforced to curb hidden debts, the absence of a large stimulus program reflects cautious optimism due to recent economic recovery signs, including improved exports and tentative real estate sales.

Speculation Surrounds China’s Economic Stimulus Plans

In the lead-up to recent announcements, there was rampant speculation regarding the scale of potential measures to revitalize the struggling Chinese economy. Some analysts predicted that the government might inject an impressive $840 billion, primarily aimed at boosting private consumption, while others even suggested the figure could rise to $1.4 trillion.

Government’s Focus on Local Debt Management

However, when Finance Minister Lan Fo’an addressed the media on Friday in Beijing, he did not unveil any extensive economic stimulus initiatives. Instead, the government confirmed its commitment to assist local governments in managing their debt challenges. The central government plans to enable local authorities to raise their official debt limits, with a significant allocation of nearly $840 billion earmarked for the period from 2024 to 2026.

This focus on local government debt highlights a pressing issue: the financial liabilities of provinces and cities could pose a serious risk to the stability of the entire Chinese financial system. Current estimates indicate that local governments are grappling with a staggering $13 trillion in debts, with Finance Minister Lan revealing that hidden debts amount to approximately $2 trillion. Many local administrations have obscured their financial burdens through opaque financial instruments.

Several factors have contributed to the deteriorating financial landscape in recent years. The ongoing real estate crisis, which began three years ago, has severely restricted a primary revenue source for local governments, as real estate companies have ceased purchasing land. Additionally, the stringent zero-Covid policy implemented by state and party leader Xi Jinping has created substantial budgetary gaps.

Lan pointed out that “weak demand and declining tax revenues complicate the resolution of hidden debts.” The newly announced program intends to facilitate the transfer of hidden debts into official budgets, aiming to reduce these hidden liabilities from $2 trillion to $280 billion by 2028.

Implementing Strict Measures Against Hidden Debts

To tackle the escalating debt crisis, Beijing has pledged to impose strict oversight on local governments. From now on, local people’s congresses will be responsible for monitoring the reduction of liabilities. The finance minister emphasized that there will be a “zero tolerance policy” regarding hidden debts, which he described as “an iron rule.”

The decision to forgo a comprehensive stimulus program at this time may be influenced by recent signs of economic recovery. For instance, exports exceeded expectations in October, and purchasing manager indices from both the government and the economic magazine “Caixin” showed a positive uptick last month.

Interestingly, the real estate sector is also displaying initial, albeit tentative, signs of recovery. In 18 surveyed cities, apartment sales have surpassed the previous year’s figures. The Chinese government is expected to keep a close watch on these developments in the coming months and may implement additional support measures if this cautious recovery fails to gain traction. Finance Minister Lan hinted at this readiness to stimulate the economy through fiscal measures during his recent address.

Investor sentiment will be closely monitored on Monday, following Lan’s press briefing, as the stock markets had already closed for the day. Recent market trends have been significantly shaped by government announcements. Following the central bank and Politburo’s signals of broad economic support at the end of September, investors reacted positively, causing a surge in the Shanghai and Hong Kong stock indices. However, this rally came to an abrupt halt after subsequent moderating statements from the Ministry of Finance and the National Development and Reform Commission.

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