BEIJING — China’s Ministry of Finance recently emphasized addressing local government debt, instead of providing the expected economic stimulus.
Finance Minister Lan Fo’an detailed four actions to help local governments tackle debt, but only hinted at increasing overall debt and deficits afterwards.
According to Morgan Stanley, focusing on local government debt is crucial. They foresee more help from the central government for restructuring and stabilizing housing.
China’s struggling real estate sector has impacted local government revenues, with many already facing financial difficulties before increased pandemic-related spending.
The Ministry of Finance’s recent policies aim to address structural issues, rather than simply boosting overall demand as suggested by some analysts.
Local governments impact demand
Lan announced that local governments can utilize 400 billion yuan ($56.54 billion) in bonds for payroll and essential services. Upcoming plans will also address hidden debts, previously estimated to be significantly lower than in 2018.
Local governments, historically responsible for significant spending, only receive a fraction of the tax revenue. This financial strain contributes to declining prices, with the core consumer price index rising only 0.1% year-on-year in September.
Anticipation for new policies
Investors are looking forward to China’s upcoming parliamentary meeting for potential budget changes. Opinions vary on the required fiscal support amount, with some suggesting around 2.5 trillion yuan to maintain growth targets.
Experts stress that fiscal policy is crucial in addressing the current economic challenges, with prior tools not being as effective now. The Chinese government has typically been conservative in its financial strategies.
— CNBC’s Sonia Heng contributed to this report.
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