China's Ministry of Finance is taking aim at local debt problems before tackling broader economic challenges
The 597-meter high Goldin Finance 117 Tower in Tianjin, China, started construction in September 2008, but still stands unfinished in this picture, taken Aug. 28, 2024. Nurphoto | Nurphoto | Getty Images
BEIJING ? China's Ministry of Finance press briefing over the weekend underscored how it is focused on tackling local government debt problems, instead of the stimulus markets have been waiting for. In his opening remarks on Saturday, Minister of Finance Lan Fo'an laid out four measures, starting with increasing support for local governments in resolving debt risks. It was only after he outlined those four points that Lan teased that the country was looking to increase debt and the deficit. "The press conference is consistent with our view that addressing local government financing struggles is a priority," Robin Xing, chief China economist at Morgan Stanley, and his team said in a report Sunday. They also expect that the central government will play a larger role in debt restructuring and housing market stabilization. "However, we believe upsizing consumption support and social welfare spending will likely remain gradual," the Morgan Stanley analysts said.
China's real estate market slump has cut into a significant source of revenue for local governments, many of which struggled financially even before needing to spend on Covid-19 measures. Meanwhile, lackluster consumption and slow growth overall have multiplied calls for more fiscal stimulus.
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The four policies announced by the Ministry of Finance are focused more on tackling structural issues, Chinese economic think tank CF40 said in a report Saturday. "They are not specifically aimed at addressing macroeconomic issues such as insufficient aggregate demand or declining price levels through Keynesian-style fiscal expansion," the report said, in reference to expectations of greater government intervention. CF40 estimates China does not need additional fiscal funding to achieve the full-year growth target of around 5%, as long as the spending that it has already announced happens by the end of the year.
Local governments drag on domestic demand
Finance Minister Lan on Saturday did say the central government would allow local governments to use 400 billion yuan ($56.54 billion) in bonds to support spending on payroll and basic services. He added that a large plan to address local governments' hidden debt would be announced in the near future, without specifying when. Lan claimed that hidden debt levels at the end of 2023 were half what they were in 2018. Historically, local governments were responsible for more than 85% of expenditure but only received about 60% of tax revenue, Rhodium Group said in 2021. Constrained local government finances have "contributed to the downward pressure on prices," the International Monetary Fund said in an Aug. 30 report on China. The core consumer price index, which strips out more volatile food and energy prices, rose by 0.1% in September, compared to a year ago. That's the slowest since February 2021, according to the Wind Information database. To Morgan Stanley, resolving local government debt problems is a "critical step" toward halting the declining trend of prices ? almost just as important as stimulus directed at boosting demand.
Waiting for another meeting
