Purpose of Local Governments' 'Hidden Debt' Exchange
The Standing Committee of the National People's Congress (NPC, equivalent to the National Assembly) of China has reportedly considered measures to increase the debt limit for local governments, according to the state-run Xinhua News Agency on the 5th.
This is intended to alleviate the burden on local governments by swapping existing "hidden debt." At a meeting held the day before the opening of the NPC, Lan Fuan, Minister of Finance, explained the plan under the State Council's authorization, and Xu Hongcai, Deputy Director of the NPC's Financial and Economic Committee, reported on the results of the bill review.
The South China Morning Post (SCMP) described this move as the first of several measures expected to be taken by the NPC to reduce financial risks and strengthen the national economy.
According to China's Ministry of Finance, local government debt reached 44.7 trillion yuan (approximately 8674 trillion won) as of the end of September. However, authorities have not disclosed the scale of local governments' hidden debt, which is estimated to be in the tens of trillions of yuan.
SCMP reported that Luo Zhiheng, Chief Economist at Weikai Securities, estimated in June that China's hidden debt amounts to about 32.2 trillion yuan (approximately 6249 trillion won). The International Monetary Fund (IMF) estimated last year that hidden debt stood at 60 trillion yuan (approximately 1,1643 trillion won).
Through debt swaps, local governments can secure funds for civil servant salaries or construction projects. China utilized swaps in 2015 to convert hidden debt into bond form to reduce the burden on local governments.
Jang Bin, Deputy Director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, forecasted last month that new government debt to be raised next year could exceed 12 trillion yuan (approximately 2329 trillion won).
Jang Jiwei, Chief Economist at Pinpoint Asset Management, said, "Regardless of who wins the U.S. presidential election, debt swaps are an issue that will happen soon," adding, "Other measures are currently underway. The scale of new policies, especially next year's fiscal policy, depends on who becomes the next U.S. president and whether a trade war occurs."
The market is closely watching the scale of stimulus measures expected from the NPC. Bloomberg estimated the final scale to be between 6 trillion and 10 trillion yuan (approximately 1164 trillion to 1941 trillion won). Major foreign media reported that a stimulus package worth 10 trillion yuan over several years, including a 6 trillion yuan budget to resolve local government debt, is under consideration. Chinese state media are likely to report on the meeting results on the 8th, the closing day of the NPC.
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