Beijing Launches $1.4 Trillion Relief Plan: Neither Addressing the Symptoms nor the Root Causes?

Beijing International Airport is far less bustling than before the pandemic, becoming much quieter. (Video screenshot)

[People News] Beijing has approved a $1.4 trillion package plan to help local governments swap mounting hidden debts. However, this time, there was no plan proposed to stimulate consumption, and the market responded pessimistically. How does the outside world interpret the reasons and effects of this plan?

According to a report by Radio Free Asia, on the afternoon of November 8, at the 12th meeting of the 14th National People's Congress Standing Committee, a vote was passed on the "Resolution on Approving the Proposal to Increase the Local Government Debt Limit for Replacing Existing Hidden Debt Submitted by the State Council," which was the "10 trillion RMB local debt swap plan" that had been widely reported in the media last week.

Since late September, Chinese investors and the market have been expecting a large-scale economic stimulus plan, which has driven the CSI 300 Index up nearly 20%. The election of Trump as U.S. president this week further boosted market expectations for this plan. However, the plan announced on Friday fell short of market expectations, with the A50 index in Hong Kong's after-hours trading dropping and the offshore yuan depreciating by 0.6% before the decline narrowed.

No Economic Stimulus Measures Taken

One of the reasons for market pessimism is that the key point of this proposal remains primarily aimed at debt resolution, lacking the real estate boosting measures and consumer stimulus measures that were previously expected.

Based on domestic and international reports, one part of the plan directly increases the debt limit for local debt swap resources by 6 trillion RMB to replace local government hidden debt and is to be implemented "in one approval, over three years." According to this arrangement, by the end of 2024, the limit on China's local government special debt will rise from 29.52 trillion RMB to 35.52 trillion RMB.

Additionally, starting in 2024, for five consecutive years, 800 billion RMB will be allocated annually from new local government special bonds specifically for debt replacement, totaling a replacement of 4 trillion RMB in hidden debt. Combined, these measures will directly increase local debt swap resources by 10 trillion RMB, about $1.4 trillion USD.

Finance Minister Lan Fo'an emphasized at the press conference that there would be no new hidden debt added, describing it as "iron discipline" with "zero tolerance." The CCP uses "hidden debt" to describe the loans, bonds, and shadow credit of local government financing platforms (LGFVs).

Local Debt Crisis: Alleviated but Unresolved

According to Lan Fo'an, as of the end of 2023, the hidden debt of China's local governments was approximately 14.3 trillion yuan. Beijing plans to reduce this to 2.3 trillion yuan by 2028. The International Monetary Fund estimates that by the end of 2023, the total debt of China's local financing platforms will reach 60 trillion yuan, accounting for 47.6% of China's GDP.

Economists generally believe that the 10 trillion yuan debt plan is insufficient to ease the current predicament of Chinese local governments.

George Magnus, former chief economist at UBS and researcher at Oxford University's China Centre, responded to Radio Free Asia's interview request via email, analyzing: "The level of hidden debt in the CCP government is very high, as seen in the cash strain and debt repayment difficulties of many local and provincial governments. Service cuts and arrears have become the norm. The new plan is financial engineering aimed at reducing the burden on local governments and buying time. It will not reduce debt, nor will it solve the limited borrowing capacity of local government departments."

However, he believes that China currently needs a new economic model rather than thorough structural reform. He said, "Fiscal and monetary policies have already been relaxed. More measures could be taken to stabilize real estate and allow developers and overextended banks to liquidate. But the biggest problem is that the government's approach is narrow, focusing only on industrial policy, exports, and self-reliance. What it should do is change China's economic model to rely more on consumption, services, productivity, private enterprises, and a reformed tax and local government system. But politically, the government neither wants nor likes these measures."

Nevertheless, former deputy director of the State Administration of Taxation, Xu Shanda, explained in an interview with the founder of China's Caijing magazine: "The 10 trillion yuan does not appear to provide new funding sources for local governments, but central government bonds have low interest rates, whereas local government debts have high interest rates. Debt swaps can ease the financial pressure on local governments, allowing them to benefit immediately."

He also believes that just restructuring debt is not enough: "Don't just give tax cuts to developers; also provide resources to home buyers. If buyers have resources to make purchases, then even if the government doesn't lend to developers, they can borrow on their own to complete housing projects."

Stagnant Economy Not Addressed

Economic commentator Wang Jian analyzed that the issuance of only a debt swap plan is not because the government does not want to stimulate the economy but rather because it has no tools to do so. Therefore, the current plan is only to solve the problem of local governments "not being able to move." "The reason they can't move is that various debts are pressing them, and without money, nothing can operate. Now, they need to secure salaries, operating expenses, and basic livelihood, which requires 10 trillion yuan annually. This is the scale of the hidden debt swap. Currently, it is about surviving; it is far from stimulating the economy."

David Huang, an economist based in the U.S., holds a different view. He analyzed to Radio Free Asia: "We now think the Chinese economy is not doing well, using Western perspectives and the views of ordinary people. But Beijing's standard for evaluation is not like that. They believe that China is a socialist system with Chinese characteristics, focusing mainly on state-owned enterprises and the state economy. So they think the Chinese economy is doing very well now, with state-owned enterprises growing significantly this year, so they don't think there's a need for action."

Preparing for Trump's Trade War: Does the CCP Have a Back-Up Plan?

Some believe that as Trump's tariff plan becomes clearer, Beijing will gradually increase support for the Chinese economy over the coming months.

Finance Minister Lan Fo'an also stated at the Friday meeting that policies related to tax incentives for the healthy development of the real estate market have been submitted for approval and will be launched soon.

Magnus believes that if new measures can support the government in purchasing land and unsold properties from developers, "it will definitely help strengthen other similar measures and reduce real estate oversupply, thereby curbing sales and forcing prices down. But we must see if the authorities are willing to allocate significant funds to this plan and if the plan will be more effective than before."

Many are therefore looking to the Politburo meeting and the Central Economic Work Conference in December 2024, where officials may have a clearer understanding of Trump's tariff stance and more time to devise fiscal strategies to protect the economy.

Trump has repeatedly hinted that he may impose a 60% tariff on all Chinese imports to narrow the trade deficit between Washington and its main geopolitical rival—a significant increase from the current average tariff of about 12.5%.

Wang Jian does not believe Trump will start a trade war with the CCP immediately after taking office. "The U.S. economy's PEC is just at 2.5; a slight increase leads to inflation, and a decrease leads to a soft landing. A trade war would increase costs and cause inflation, so it may not be an urgent matter for Trump; it may not be a priority."

David Huang holds a different opinion. He said that after the last round of governance, Trump already understands the CCP very well. Last time, Trump began imposing tariffs on China two years into his term, but this time it may happen quickly, "perhaps as early as February next year." He also believes that Trump does not need to impose tariffs directly; simply announcing a timeline would prompt the CCP to respond.

China's Economy Faces Significant Risks and Uncertainties

If Trump's tariffs are implemented, economists generally believe it would be a heavy blow to China.

Magnus analyzed: "The last time Trump did this, the CCP responded with retaliatory tariffs, but this time, the CCP lacks options to counteract U.S. trade. China is going through a difficult period. If these proposals are implemented, they will severely impact China and prompt more companies to leave the mainland."

Brookings Institution senior fellow and former Goldman Sachs chief foreign exchange strategist Robin Brooks predicted on X that if Trump imposes a 60% tariff on China, "we will see unprecedented dollar appreciation. The CCP will have only one option: let the yuan devalue significantly."

Wang Jian believes that a mass exodus of Chinese companies from the mainland would have more severe negative effects on the Chinese economy: "Unemployment in China will definitely worsen, local tax revenue will decline, and there will be even less money."

However, economists agree that trade wars are only a means, not an end. Trump's goal in raising tariffs is still to balance trade and bring the CCP back to the negotiating table.

David Huang analyzed that after previous interactions with Trump's policies, the CCP likely understands his approach well. Negotiations are bound to happen, and he believes there is a "high probability they will succeed, with a low chance they won't," as the CCP knows that without the powerful U.S. market, selling Chinese goods anywhere else in the world would not be profitable.

Beijing's $1.4 trillion plan is seen by outsiders as addressing neither the symptoms nor the root causes. The future remains uncertain, and George Magnus even remarked: "Perhaps Elon Musk could find a way to mediate between Trump and Xi Jinping, but it would be a formidable task."