China Unveils $839 Billion Debt Swap To Rescue Local Governments

China announced a 10 trillion yuan ($1.4 trillion) program to refinance local government debt, as Beijing rolls out more measures to support a slowing economy facing new risks from the reelection of Donald Trump.

China will raise local governments’ debt ceiling to 35.52 trillion yuan, which will allow them to issue six trillion yuan in additional special bonds over three years to swap hidden debt, the Xinhua News Agency reported on Friday. Authorities later said local governments will be able to tap another total of 4 trillion yuan in new special local bond quota over five years for the same purpose.

The plan approved by the Standing Committee of the National People’s Congress is close to the upper range of forecasts by most economists as China seeks to curb financial risks and shore up growth. It is the first time since 2015 that authorities raised the debt ceiling for local governments in the middle of a year.

The swap is “a major policy decision taking into consideration international and domestic development environments, the need to ensure the stable economic and fiscal operation, and the actual development situation of local governments,” Finance Minister Lan Fo’an said at a briefing.

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

Lan estimates the swap can save around 600 billion yuan in interest payments over five years, which will 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 economy grew 4.6% in the third quarter, the weakest pace since March last year, putting in doubt Beijing’s ability to hit its annual expansion target of around 5%. That slowdown prompted policy makers to pivot toward more supportive policies, including interest-rate cuts and help for the stock and real estate markets.

The shift in late September triggered a historic stock rally and prompted global banks including Goldman Sachs Group Inc. to upgrade their forecasts for the $18 trillion economy. But Trump’s election victory has fuelled calls on Beijing to strengthen policies to boost domestic demand to offset a potential drop in exports due to the president-elect’s tariff threats.

The push to cut hidden debt accumulated by local governments, which Lan described as the biggest in years, 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, however, have argued that fiscal stimulus to bolster consumption would have a more direct and immediate impact on economic growth.

Initial signs are emerging the latest round of supportive measures may have had some effect. Home sales posted their first rise this year in October, while activity in both the manufacturing and service sectors improved from the previous month.