China unveils debt-relief plan, keeps further stimulus salvo in reserve arsenal

Beijing has let loose the first arrow from its closely watched stimulus arsenal, by unveiling an additional 6 trillion yuan (US$837 billion) bond quota to resolve the so-called hidden debt of local governments while pledging more “forceful” fiscal support measures to underpin China’s economic growth.

The debt-swap move, beginning “immediately”, will help the world’s second-largest economy reduce the mountain of debt being held at local levels across the country -widely seen as a fiscal time bomb – by 12 trillion yuan by 2028, and economists say it could help crush a major stumbling block impeding China’s economic growth.

It will relieve local governments’ liquidity pressure and free up resources for economic development, Minister of Finance Lan Foan said on Friday after China’s top legislative body, the National People’s Congress Standing Committee, concluded a week-long session.

While no new fiscal stimulus measures were announced to directly boost the economy, more are on the way, including a “more supportive fiscal policy” for next year, Lan pledged.

“The central government still has a lot of room for borrowing and increasing deficits. At present, we are actively planning the next step of fiscal policy and are stepping up countercyclical adjustments,” he said.

According to the announcement on Friday, raising the quota for local special bonds by 6 trillion yuan will be done over the next three years – 2 trillion yuan per year – to bring high-yielding, off-balance-sheet debt onto the budget that allows for lower interest payments.