China unveils $1.8 tn package to help debt-ridden local governments but falls short of providing strong stimulus

China announced a whopping 10 trillion yuan in debt support to local governments that are struggling. Apart from the debt support the Chinese authorities are planning to introduce other economic measures but fell short of introducing a stimulus package which many analysts were expecting to be released.

The fiscal package which is expected to help local governments boost their economies includes raising the debt ceiling by 6tn yuan over three years. The initiative would help the local government to replace their hidden debt which the authorities have estimated to be at 14.3 tn yuan at the end of 2023, South China Morning Post reported.

According to the International Monetary Fund, hidden debt refers to the borrowing for which the government is liable but the figure is not disclosed to citizens and other creditors. The Chinese authorities noted that the new economic measures could cut the debt of local governments to 2.3 tn yuan by the end of 2028.

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According to _SCMP, a_fter the 2008 financial crisis, local governments increasingly used financing vehicles to rake up the hidden debt as many spent big on infrastructure projects. However, the debt kept on ballooning and the revenues kept on falling. In light of this, local governments started cutting the pay of civil servants and sometimes they even held back their wages.

‘China’s most powerful debt reduction measure’ 

While speaking on the initiative, China’s state broadcaster CCTV, called the initiative as China’s “most powerful debt reduction measure in recent years." The news outlet maintained that the economic package would help the government to “develop a better economy and protect the livelihoods of people.”

However, experts believe that the debt relief package did not come close to “resolving the enormous debt problem.” Prof Victor Shih, an expert on the politics of Chinese banking and fiscal policies at the University of California San Diego in the US explained that it is just an “accounting exercise”.

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The initiative does not bail out local governments or address the civil servant pay arrears, but instead moved hidden debt onto the books, he said. He also mentioned that the claim that hidden debt totalled 14.3tn yuan was “a fiction” and insisted that the actual number can be 50tn yuan or more.

China doesn’t reveal it all 

The announcement of the latest economic package came at the end of a days-long meeting of the National People’s Congress standing committee, the highest lawmaking body in the Chinese Communist party. After the meeting, Chinese Foreign Minister Lan Fo’an said that more measures were to come, but did not give details of exactly when.

Many believe that Beijing might be possibly waiting for the outcome of the 2024 US presidential election. During his campaign trail, President-elect Donald Trump had promised to impose larger trade tariffs on China. “Export has been the main engine of economic growth in China for the past four years. So without additional stimulus from the government, I think growth is going to be under pressure if the US introduces tariffs," Shih explained.

With inputs from agencies.