China has authorized local governments to take on an additional 6,000 billion yuan in debt as part of a strategy to address the "hidden debt" accumulated by local authorities.
This hidden debt, which has surged in recent years due to extensive infrastructure projects, is officially reported at 14,000 billion yuan in 2023. However, estimates from the International Monetary Fund suggest the figure could exceed 80,000 billion yuan.
The increase in the debt ceiling aims to support the struggling property market and bolster investments in the real economy. The recent measures are designed to allow local authorities to refinance this hidden debt at lower costs, thereby alleviating some of the financial pressure they face.
The urgency of these measures is underscored by the ongoing real estate crisis in China, which has significantly impacted local government revenues. Falling land prices and a slowdown in property sales have led to substantial revenue losses for local authorities, who primarily finance their operations through land sales to developers.
Economists suggest that the new debt will effectively replace existing bad debt, enabling local governments to finance new projects and revitalize the beleaguered property sector.
While these measures represent a significant shift in fiscal policy, their impact on overall economic growth may be limited. China achieved a growth rate of 4.8% in the first nine months of the year, bringing it closer to its 5% growth target for 2024.
However, the savings from interest payments for local governments are projected to account for less than 0.1% of the country's GDP. Beijing has already implemented various monetary measures, including lowering interest rates and easing restrictions on property purchases, in response to the real estate crisis.
The decision to tackle hidden debt is seen as a necessary step to mitigate systemic risks that could threaten the broader Chinese economy. As local authorities navigate their financial challenges with the support of the new debt measures, the focus will likely shift to how effectively they can implement projects that stimulate growth and restore confidence among consumers and investors.