Octus on Credit: China’s $1.4T-equivalent stimulus targets distressed local governments

Katherine Shi, China Editor

China finally unveiled its new fiscal stimulus measures last Friday, November 8. The 10 trillion Chinese yuan ($1.40 trillion) package includes CNY 6 trillion in additional special-purpose bonds for local government debt swaps over the next three years, and CNY 4 trillion released over the next five years from debt already approved through special purpose bond quotas. 

The stimulus is targeted at resolving the severe financial stress faced by local governments. 

As China’s local government financing vehicles, or LGFVs, face more concentrated maturities over the next three years, the debt swaps are intended to allow local governments to extend their debt maturity profiles, giving them room to increase fiscal expenditure, ultimately boosting the economy and stimulating consumption. 

The debt swap program also targets the issue of local enterprises’ climbing account receivables, on the assumption local governments would use budget to repay debt owed to local enterprises, in turn encouraging more fixed asset investments by private enterprises. 

If all goes according to plan, according to the country’s regulators, local government hidden debt needing to be resolved would be dramatically lowered from CNY 14.3 trillion to CNY 2.3 trillion before 2028, greatly alleviating the debt pressure faced by local governments.

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