- CNY4trn is allocated specifically for debt swap in the next five years.
- CNY2trn of implicit debts from shanty town renovation projects will be repaid by 2029.
- Potential measures include injecting capital into major banks and purchasing unsold housing.
- Implications for our forecast: We expect GDP growth to reach 5% in 2025.
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The press conference of the 12th session of the Standing Committee of the 14th National People's Congress held today.
Policies announced:
Increase local government debt quota for hidden debt swap by CNY6trn. The increased CNY6trn debt quota will be entirely arranged as a special debt quota and implemented over three years. The annual CNY2trn issuance is roughly equivalent to 1.6% of GDP. According to this arrangement, the outstanding local government special bond quota for end-2024 will be increased from CNY29.5trn to CNY35.52trn. China will also allocate CNY800bn from the newly increased local government special bonds for debt swap each year for five consecutive 5 years, totalling CNY4trn specifically for local government debt swap. CNY2trn of implicit debts from shanty town renovation projects maturing in 2029 and thereafter will still be repaid according to the original contracts.
Implications:
1. The debt swap program addresses the large hidden debt held by local governments and financing vehicles, estimated at around CNY60 trillion by the IMF as of last year. While not fully resolving the issue, the debt swap program takes meaningful steps toward tackling these growing hidden liabilities at the local level.
Amid declining revenues from taxes and land sales due to economic and property market downturn, local governments have scaled back spending. The new program brings previously off-balance sheet debts by incorporating them onto official records. Consolidating hidden debt and renegotiating repayment terms lowers servicing costs, freeing up cash that would otherwise go toward high-interest loans.
With these savings and new funding, regional governments are better positioned to stabilize growth by ensuring timely salary payments, maintaining essential infrastructure projects, relieving cash flow pressures for local businesses, and creating a more predictable environment through relaxed tax enforcement.
According to Finance Minister, in addition to the debt swap program, other key policies have "entered the decision-making stage." These include special sovereign bonds for capital replenishment at major banks and special local government bonds to purchase unsold housing or idle land.
The capital injection is crucial, as diminished net interest margins and weak earnings have left banks in need of fresh capital to meet demands from recent rate cuts and expanded mortgage relief (i.e. narrowing the rate gap between existing and new mortgages and easing down-payment requirements for second homes). At a record low of 1.54% in Q2, these compressed margins have intensified pressures on banks' balance sheets.
Given central government debt is relatively low at under one-quarter of GDP, Beijing appears well-positioned to take on this additional fiscal responsibility.
2. Meanehile, local government will speed up the affordable housing programme to clear the unsold inventories and idel land. Our property team estimates the 14th Five Year Plan's affordable housing program will help absorbing CNY 1.3 trillion, which is projected to clear 75% of the excess inventory. These coordinated measures aim to rebalance the demand-supply dynamics and stabilize prices, which is crucial not only to the housing market but also reviving consumption through a positive wealth effect.
3. Today’s stimulus measures are expected to partially mitigate the economic impact of elevated trade tensions. Our estimates indicate that a blanket tariff of 60% on Chinese exports to the US proposed by the incoming administration could reduce China’s real GDP growth by 0.5 to 1%ppt. Yet this loss may be partly offset by the stimulus, which we project will contribute approximately 7% to GDP growth.
4. The actual impact may prove even less severe as the new US administration is likely to raise tariff on other countries, which could dilute the specific effect on China. Additionally, China is better positioned to withstand the protectionist climate compared to the past. Burgeoning demand from EMs may help cushion the potential loss of trade income from the US.
In particular, China has seen significant growth in exports to ASEAN, which accounted for 16.2% of its total shipments in 1Q-3Q. Other key growth markets include the Middle East (6.6%), Latin America (7.9%), and Russia (3.2%). Furthermore, Chinese exporters may find opportunities to reroute goods destined for the US and EU through these alternative trading partners.
Meanwhile, the full effects of the proposed tariffs are unlikely to materialize before late 2025 or early 2026, as American importers may frontload purchases to avoid impending tariff hikes.
Conclusion:
With the synergy of policies, local governments are poised to foster growth by pushing forward infrastructure projects and clearing the unsold property inventories. Such stimulus package will partly offset the loss of trade income from the increased US tariff. Clearing backpayments owed to corporates and employees will also aid consumption and investment sentiment. At last, this will improve the quality of financial assets and strengthen credit capacity.
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Nathan Chow 周洪禮
Senior Economist and Strategist - China & Hong Kong 高級經濟學家及策略師 - 中國及香港
[email protected]
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