China Unveils $1.4 Trillion Debt Swap to Help Local Governments

China unveiled a 10 trillion yuan ($1.4 trillion) program to help resolve its local government debt crisis, as authorities moved to shore up a slowing economy facing fresh risks from the reelection of Donald Trump.

Officials fleshed out the details of a debt swap plan approved by the Standing Committee of the National People’s Congress at a press briefing in Beijing on Friday. The funds for the program — already telegraphed last month but without a price tag — will be provided through 2028, they said.

Finance Minister Lan Fo’an also pledged to take a “more forceful” fiscal policy next year, and “actively” use the room for higher official deficit, in a sign that bolder steps could lie ahead.

While the scale of the local debt swap plan was close to the upper range of forecasts by most economists, it disappointed markets due to a lack of fresh public spending to promote growth. Trump’s sweeping election comeback stoked expectations for Beijing to strengthen policies boosting domestic demand to offset a potential plunge in exports due to the president-elect’s tariff threats.

“We hope to see more in terms of stimulus once China sees the impact of what has been announced so far, as well as the direction of Trump policies early next year,” said Kevin Net, head of Asian equities at Financiere de L Echiquier.

As officials outlined the contours of the debt swap plan, the offshore yuan extended its losses, down 0.6% at 7.1891 per dollar. The yield on 10-year China government bonds dropped to the lowest since September.

President Xi Jinping has labeled local government debt one of the three “major economic and financial risks” facing China, as he tries to steady the nation’s $18 trillion economy. Most of these borrowings are tied to entities known as local government financing vehicles, which borrow on behalf of provinces and cities to finance investment in infrastructure.

Local authorities that relied on land sales for revenue have struggled to service those liabilities in recent years as the property crisis wiped out demand for new building. Officials at the briefing said the outstanding value of so-called hidden debt was 14.3 trillion yuan as of the end of 2023, although the International Monetary Fund put that figure at about 60 trillion yuan.

While markets shrugged off the measures, Lan called the package “a major policy decision taking into consideration international and domestic development environments.” Policymakers also took the rare step of raising local governments’ debt ceiling mid-year for the first time since 2015 to allow for the issuance of bonds.

The increase in the debt limit will allow local governments to issue six trillion yuan in additional special bonds over three years to swap hidden debt, Lan said at the briefing. He later said regional authorities will be able to tap another total of 4 trillion yuan in special local bond quota to be granted each year over five years — including 2024 — for the same purpose.

“To really have a positive for markets, you want to see something which is 2 trillion or above specifically talking about consumption-related stimulus,” Bernie Ahkong, CIO at UBS O’Connor Global Multi Strategy Alpha told Bloomberg TV. A lack of measures to boost domestic demand may have disappointed investors, he added.

Investors will now be looking to December for the next major window for bigger measures to stimulate the economy, when the 24-man Politburo will discuss the economy at a monthly meeting and policymakers will huddle at the annual Central Economic Work Conference. By then, officials could have greater clarity on Trump’s stance on tariffs.

Officials could still unveil a “meaningful” fiscal package in the near term, according to Xiaojia Zhi, head of research at Credit Agricole CIB. Additional spending of 12 to 13 trillion yuan is possible in the next three years, to offset the impact from aggressive US tariff hikes, she added.

Another 2 trillion yuan in hidden debt related to the redevelopment of rundown homes will only come due after 2029, which also takes off some pressure from local governments in the near future, according to Lan.

Explaining the impact of the package, Lan estimated the swap could save around 600 billion yuan in interest payments over five years, which would allow resources to boost investment and consumption. He said outstanding hidden debt was 14.3 trillion yuan as of the end of 2023.

China’s policymakers unleashed their boldest stimulus package since the pandemic in recent months, as slowing growth putting Beijing’s ability to hit annual expansion target of around 5% in doubt. That shift in late September triggered a historic stock rally and prompted global banks including Goldman Sachs Group Inc. to upgrade their forecasts.

The push to cut hidden debt accumulated by local governments has been hailed by Morgan Stanley economists as a “critical” step in breaking a deflationary spiral and “equally important” to direct demand stimulus. Other analysts have argued that fiscal stimulus to bolster consumption would have a more direct and immediate impact on economic growth.

“The debt swap program alone cannot support growth,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd. “China needs a wholesale reform of the fiscal and tax system to support the financial sustainability of local governments.”