Policymakers gathered in Beijing this past week approved a proposal to swap six trillion yuan ($840 billion) of hidden debt belonging to local governments for official loans with more favourable terms.
Hidden debts are defined as borrowing for which a government is liable, but not disclosed to its citizens or to other creditors.
Here are some of the key points behind China's massive debt shakeup:
- Where is the debt hiding? -
Much of local governments' hidden debt in the past two decades was accumulated through state-owned companies known as local government financing vehicles (LGFVs).
While the provincial and regional authorities themselves faced restraints on their own borrowing, LGFVs were less regulated and used for taking out loans and issuing bonds in order to finance infrastructure projects.
But local governments today are running out of infrastructure needs to meet, which means that newer projects, like extra bridges and conference centres, tend to make less money back as there is little demand for them.
And with the national real estate market crashing and hurting government land-sale revenues, LGFVs risk defaulting.
China's local governments had an estimated 60.4 trillion yuan ($8.4 trillion) of debt hidden in LGFVs as of 2023, according to the International Monetary Fund.
- Why does hidden debt matter? -
Burdened by debt, local authorities have in recent years turned to cost-saving measures like cutting civil servant salaries and pensions, suspending transport services and aggressively collecting fines and fees from businesses.
According to the Chinese financial publication Caixin, local governments in the Guangxi, Shaanxi and Sichuan regions saw a significant increase in fines collected in the first half of 2022.
And the central government in Beijing this year warned localities not to raise revenue through fines, after a county in northern Hebei province was found in January to have forged signatures on nearly 2,000 traffic violation tickets.
The penny-pinching has hurt business and consumer confidence, while local government creditors and infrastructure contractors remain unpaid.
- What is China doing to fix this? -
The debt swap plan announced Friday will raise the local government debt ceiling every year from 2024 to 2026, with a total of $558 billion of hidden debt that can be replaced.
Meanwhile, $112 billion "will be arranged from new local government special bonds every year for five consecutive years to supplement government financial resources", Finance Minister Lan Fo'an told reporters on Friday.
The scale of the plan exceeded expectations, but analysts at Goldman Sachs warned on Friday that its impact would be small unless "the majority of the proceeds are used to pay corporate arrears and delayed civil servant salaries".
If used correctly, the new measures could "free up fiscal resources and allow local governments to function more normally", Societe Generale analysts wrote.
This is not the first time China's central government has tried to rein in local debt.
In 2015, Beijing rolled out a debt-for-bonds programme that encouraged local governments to exchange loans for lower-interest bonds.
This was followed over the years by a slew of debt-tackling measures including specific bonds intended to help refinance existing projects.
The new debt plan is part of a raft of policies unveiled by officials since September, all aimed at lifting the country from a prolonged downturn.
Beijing has eased home purchasing restrictions and cut interest rates to boost economic activity, but analysts have called for more detailed stimulus measures.
China consumer prices rise slower in October; Cartier profit sinks as China sales slump
Shanghai (AFP) Nov 9, 2024 - China's consumer inflation rate slowed in October, official data showed Saturday, in a sign that demand remains sluggish in the world's number two economy.
The slowdown comes as authorities have been seeking to boost domestic activity as a property crisis weighs on confidence.
The consumer price index (CPI), a key measure of inflation, rose 0.3 percent year-on-year in October, down from 0.4 percent in September, the National Bureau of Statistics (NBS) said.
The latest figure came in below the 0.4 percent forecast in a Bloomberg survey of economists.
The data was released after Chinese lawmakers on Friday unveiled a sweeping plan to lift local government debt and boost spending.
While many major Western economies have been grappling with the threat of high inflation, China has instead been battling low or negative prices.
At the end of 2023, the country sank into deflation for four months, with the sharpest contraction in consumer prices in 14 years in January.
Factory-gate prices also slid 2.9 percent year-on-year in October, compared to a decrease of 2.8 percent in September, the NBS said on Saturday.
This extends a deflationary run that began in late 2022.
Beijing began to unveil a raft of measures in September aimed at boosting economic activity, including rate cuts and the easing of some home purchasing restrictions.
However analysts have bemoaned the lack of detail so far.
China's Premier Li Qiang this week said he was "fully confident" the country would hit its growth target of around five percent for 2024, but in the third quarter the country saw its slowest expansion in a year and a half.
The impending return of Donald Trump to the White House also threatens further grief for Beijing, with the US president-elect promising punishing tarriffs on Chinese goods.
Saturday's data shows "deflationary pressure is clearly persistent in China," Zhiwei Zhang, chief economist at Pinpoint Asset Management, said in a note.
"Stimulus targeting the consumption side would be more effective to boost domestic demand, and avoid exacerbating the overcapacity problem," Zhang said.
Cartier owner's profit sinks as China sales slump
Zurich (AFP) Nov 8, 2024 -
Cartier owner Richemont posted Friday a hefty drop in net profit for the first half of the year as watch sales sank in China, where weak consumer spending has hit the luxury sector.
Richemont said its profit after tax reached 457 million euros ($492 million), down from 1.5 billion euros in the same six-month period last year as it booked a 1.2-billion-euro write-down from the sale of its Yoox-Net-A-Porter online fashion business.
Its net profit for continuing operations was 1.7 billion euros ($1.8 billion) in the six-month period ending in September, 20 percent lower than in 2023 and less than expected by analysts polled by Swiss news agency AWP.
Global sales fell one percent to 10.1 billion euros.
Sales from the Asia-Pacific region were down by almost a fifth while all other regions in the world posted "solid growth", Richemont said in a results statement.
Citing "reduced consumer spending" in China, Richemont said growth in other Asian countries was "more than offset" by a double-digit drop in sales in the world's second biggest economy.
"The global watch market is experiencing a slowdown, particularly in China, which is affecting all watchmaking brands globally, with the high-end segments showing greater resilience," Richemont chairman Johann Rupert said in the statement.
He said Chinese demand "will take longer to recover".
Last month, French group LVMH, the world's biggest luxury company whose brands include Louis Vuitton, Dior and Bulgari, reported a 4.4 percent drop in third-quarter sales.
Gucci owner Kering said its sales sank 15 percent in the same quarter due to slowing consumer spending in China.
Richemont's stock price fell more than four percent in the Swiss stock exchange.
"There is a slowdown in China that we are experiencing like our competitors," Richemont chief executive Nicolas Bos said in a conference call.
"We have no clue on how long it will last and whether we've reached the bottom or not," he said.
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