China’s stimulus falls short, as a showdown with Trump looms

ECONOMISTS SOMETIMES say that China suffers from the three Ds: debt, deflation and poor demography. America’s presidential election added a fourth: Donald Trump, who has threatened to slap high tariffs on Chinese exports when he returns to the White House. To counter these dangers, investors had hoped China would announce a decisive fiscal rescue package after a legislative meeting on November 8th. China’s leaders, though, seem stuck in a cautious crouch. After the meeting, the finance ministry unveiled a new plan to tackle one of the Ds: debt. But it shared no new measures that would help it beat back deflation.

Lan Fo’an, China’s finance minister, said that local governments would be allowed to issue extra bonds worth trillions of yuan to replace riskier “hidden” debts. These veiled liabilities typically belong to local-government financing vehicles (LGFVs), quasi-commercial infrastructure firms sponsored by city and provincial authorities. The debts of LGFVs totalled about 60trn yuan ($8.6trn) at the end of 2022, about one-fifth of it risky, according to Goldman Sachs, a bank. To refinance these debts, local governments will be able to issue bonds worth up to 10trn yuan over the next five years.

Hidden debts have been a nagging worry for China’s rulers and investors for the past 15 years. Barred from issuing many bonds of their own, local governments raised money through LGFVs instead. Lou Jiwei, China’s formidable finance minister from 2013 to 2016, tried to bring these debts under control during Xi Jinping’s first term as president. His approach set the precedent for the latest initiative. Local governments were allowed to sell more bonds (an explicit obligation) in place of the implicit, off-balance-sheet debt raised by LGFVs. “Open the front door and close the back door,” as Mr Lou put it.

Unfortunately, the back door kept popping open whenever ambitious local governments felt the need to gin up the economy. Their hidden debts have also become harder to sustain in recent years. China’s slowdown has hurt tax revenues and the slump in the property market has undermined land sales, a significant source of money for local governments. In response officials have cut back public services, sold state assets and harassed businesses for back taxes and fees. The most notorious example was a 66,000-yuan fine imposed on a grocer in Shaanxi province for selling 2.5kg of substandard celery. China’s cabinet has urged the most indebted provinces to “smash the pots and sell the iron”, a poor man’s version of selling the family silver.

China’s central government resents the financial indiscipline of lower-level authorities. But it also fears the consequences of letting them fail. It has not permitted an explicit default on a local-government bond, including the bonds issued by LGFVs. Bail-outs, though, have been grudging and often indirect. Mr Lan referred to clearing “landmines” one by one. The plan announced on November 8th represents a pre-emptive effort to remove risks, rather than a hurried response to fiscal emergencies. It will, Mr Lan said, allow local officials to devote more time and attention to other things. And because the cost of financing “front-door” bonds is lower than that for risky, back-door debts, the plan will save local governments 600bn yuan in interest payments over five years.

That is welcome. But those interest savings amount to less than 0.1% of China’s expected GDP over the next half-decade. Investors had hoped for more generous, and more direct, measures to boost spending and dispel deflation. The government is said to be considering handouts for poorer households and subsidies for childbirth. It could expand a trade-in programme that resembles America’s “cash for clunkers” scheme, encouraging consumers to hand in their old cars, fridges, air-conditioners and other appliances for newer, greener ones. The finance ministry said on November 13th that it would cut taxes on some property transactions, extending a tax break previously reserved for smaller units to larger ones. More such measures may appear in the coming months. But China’s leaders clearly see no urgency to announce them just yet.

Preparing for war

The country’s rulers may be planning to save their fiscal ammunition for the bigger battle they will face if Mr Trump follows through on his threat to start a second, fiercer trade war. The next big economic events on China’s political calendar are the party’s economic-work conference in mid-December and the meeting of its rubber-stamp legislature in March, when the budget and growth target will be announced. By then Mr Trump’s intentions may be clearer. But China’s economic problems may also be deeper. ■

Subscribers can sign up to Drum Tower, our new weekly newsletter, to understand what the world makes of China—and what China makes of the world.