The Ministry of Finance was keen on solving the debt problems of local governments takes over more systemic approaches to deeper economic challenges that markets have been measuring for months. In a press briefing Saturday, Finance Minister Lan Fo’an outlined a four-point plan to strengthen support for local governments, aimed at easing their debt risks.
Minister Lan thus spoke words of reassurance, saying the central government will allow local governments to spend 400 billion yuan (approximately $56.54 billion) in bonds for payroll and other essential services. He said that an overall plan to address the hidden debts of local governments will soon be unveiled, though he did not say exactly when that would be. Lan said hidden debt levels have significantly decreased, cutting by half according to some reports, since 2018.
Analysts at Morgan Stanley say: “The move of the Ministry also means that there is a more direct focus toward solving problems in local government financing, given how real estate has dipped into what is normally an important source of revenue for local authorities. They anticipate that the central government would engage more in debt restructuring and stability of the housing market as well.”. However, according to the analysts rise in consumer support and social welfare spending is likely to be slow.
The bright economic outlook is still unclear because slow growth coupled with weak demand by consumers continues to strain on fiscal policies. The CF40, a Chinese economic think tank believed that the measures disclosed recently were mainly aimed at structural issues and not fiscal expansion measures of broader scale that could boost demand.
With a critical parliamentary session set for the end of the month, expectations are mounting on fiscal adjustments. Analysts are poles apart on the degree of fiscal support required and forecast it in the range of tens of billions to trillions of renminbi. Julian Evans-Pritchard from Capital Economics, for example, now claims at least 2.5 trillion yuan more should be added to maintain growth targets.
In summary, although the of debt among local governments is still a hotspot in China’s fiscal policy, its larger-scale economic recovery scheme seems prudent, while the complexity at hand underscores the complexity of the new landscape of economics.
