By Eric Vandenbroeck and co-workers

The Problem for Beijing

China on Friday November 8, announced a $1.4 trillion stimulus program to help local governments deal with debt, as Beijing grapples with a struggling economy and the possibility of a new trade war with the United States after Donald Trump’s election victory this week.

The highly anticipated announcement, the second stimulus package in six weeks, is an effort to bolster cash-strapped local governments, including those of cities and towns, but economists say the initiative will not be enough to address underlying issues and inject real momentum.

At the end of the week-long National People’s Congress on Friday, Chinese Finance Minister Lan Fo’an unveiled a program to raise local government debt limits by $838 billion over three years, with an additional $559 billion available for local governments to tap over five years.

This total is more than double the $586 billion the Chinese government pumped into the economy in the wake of the 2008 global financial crisis.

Lan said the new stimulus plan was a “major decision” and would ensure the “smooth operation of the economy and finance, and the actual debt reduction of local governments,” according to an official transcript of the news conference.

Local government debt has ballooned in recent years as China’s crumbling property market has caused a cash crisis for local governments. With the value of real estate decreasing, local governments haven’t been able to gin up funding through land sales.

The announcement comes amid a gloomy year for the Chinese economy, which is struggling to rebound from draconian “zero-covid” policies implemented by Beijing during the pandemic.

Unemployment among young people remains high, while official statistics show that real estate investment fell in September, declining by more than 10 percent year over year.

A man walks in an upscale commercial area of Beijing on Tuesday 5 November 2024.

Beijing has recently stepped up its efforts to boost the economy in a bid to meet its target of 5 percent growth for this year. Chinese financial authorities in September announced significant stimulus measures, including slashing interest rates and bolstering the property market.

There have been some small signs this has helped lift the economy: The stock market rallied, manufacturing activity has increased and exports have risen at their fastest pace in a year, according to official statistics. Youth unemployment in urban areas has meanwhile ticked down.

Positive changes were emerging, Sheng Laiyun, deputy director of China’s National Bureau of Statistics, said last month. But the changes “are still preliminary” while the economic recovery “remains unsteady,” he said.

Economists say that Beijing’s announcement will do little to stem the urgent issue of deflation, which many experts argue would be better addressed with direct cash payments to families.

“What they have announced is a package meant to manage risk, stabilize the economy to prevent it from falling further, instead of directly stimulating domestic demand, which is actually what I think they should do,” said Tianlei Huang, an expert on the Chinese economy at the Peterson Institute for International Economics. “Because I think the number one challenge the Chinese economy faces now is deflation.”

Shoppers walk past outdoor stalls at the Wangfujing shopping street in Beijing on Nov. 1.

Huang said that Beijing has a fundamental opposition to handing out cash. “They don’t like welfarism,” he said, adding that Chinese officials think it would “encourage people to become lazy.”

The measures announced Friday will allow local governments to swap some off-the-books debt for official debt.

This “hidden debt,” which local governments use to fund infrastructure development and necessary spending, amounted to more than $9 trillion last year, equivalent to more than half of China’s gross domestic product, according to International Monetary Fund estimates.

But China on Friday put it at a much lower amount of around $2 trillion.

Lan said Beijing would make it “a matter of ‘iron discipline’ not to create new hidden debt.” However many economists agree that these moves are unlikely to be a long-term fix.

Local governments are not given adequate funds from Beijing even as they face greater outlays, said Victor Shih, the director of the 21st Century China Center at the University of California at San Diego. The new package will temporarily reduce the burden on municipalities, but they will still have to borrow to maintain basic government functions, he added.

“It’s really not going to address the problem in a meaningful way,” Shih said. “There will be round after round of these small bailouts to make sure that things don’t get out of control, but the underlying debt amount will still rise.”

Trump’s return to the Oval Office adds another complicating factor to Chinese leader Xi Jinping’s economic planning. On the campaign trail, Trump has threatened to impose tariffs of up to 60 percent on Chinese goods.

In his first term, he launched a punishing trade war on the world’s second-largest economy, implementing tariffs on roughly $360 billion in Chinese goods. Exports from China, which surged over the summer, have been a rare bright spot for Beijing in the otherwise depressed economy.

“Beijing is launching a stimulus largely to repair confidence,” said Gerard DiPippo, senior geoeconomics analyst for Bloomberg Economics. “And if the U.S. is declaring a second trade war, it might undo those stabilization measures on the confidence side, certainly with foreign investors and possibly with Chinese households. So that would be a rather big problem for Beijing.”

 

 

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