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The writer is chief economist of JD Group
China’s latest fiscal stimulus package aims to address the problems of the country’s local government debt held off balance sheets and lay the foundation for sustainable growth.
But the market’s reaction — from a sharp drop in the renminbi exchange rate to a slump in Hong Kong’s Hang Seng index — suggests that strong doubts linger over whether this Rmb10tn ($1.4tn) plan goes far enough. The scepticism is widespread. A closer look, however, reveals five key misconceptions about what China is really trying to achieve here:
“The package is too small” The most common critique is the planned local government debt restructuring doesn’t make a big enough splash to jolt the economy. It allows local governments to issue Rmb6tn in additional special bonds over three years to replace “implicit” off-balance sheet debt. They also will be able to issue another Rmb4tn in tranches over five years.
The sceptical view overlooks the bigger picture: this package isn’t a one-off cash injection but part of a co-ordinated, long-term restructuring. Combined with further planned special bond issuance planned for 2025 and an expected increase in the fiscal deficit, it is also a substantial stimulus
“Debt replacement is just a technical fix” Some sceptics see the debt swap as little more than an exercise in balance-sheet reshuffling, with no real impact on spending. But by converting implicit debt into explicit, interest-bearing bonds, the government is doing more than bookkeeping. This shift gives local governments some badly needed breathing room after being told to eliminate implicit debt. Additionally, I estimate the debt restructuring could save Rmb600bn in interest costs over the same period. For years, local governments had to squeeze their budgets, generating fiscal surpluses just to keep implicit debts at bay. Now, they can allocate more resources towards development and essential services.
This added fiscal space isn’t just theoretical — it’s expected to boost demand by about 1 per cent of GDP annually for the next five years. Far from a mere technical fix, this debt shift is about channelling resources back into the economy.
“It only helps the government, not businesses or households” Another concern is that the package only addresses government debt issues, leaving businesses and households on the sidelines. Yet local governments’ financial constraints have impacted both these groups significantly. Years of tight budgets have led to cuts in public investment and social services, payment delays for infrastructure projects, and even deferred salaries. With local governments now under less fiscal strain, they can finally catch up on outstanding payments and resume procurement.
“The package focuses on investment, not consumption” There’s also a perception that China’s stimulus is overly weighted towards infrastructure and investment projects. However, this package frees up funds for public services, education, healthcare and other areas that support consumer demand. Looking forward, the planned expansion of the fiscal deficit in 2025 could create more space for consumer initiatives such as subsidies for buying appliances and car trade-ins.
“There’s nothing in it for 2024” Some argue that this package’s focus is too long-term and lacks measures to boost growth in 2024. However, the government has several channels for funding this year: remaining special bond quotas, local government bonds and untapped debt swaps could all pump money into infrastructure projects, public payrolls, and overdue payments. Additionally, reserves from sources like profits from state-owned enterprises and budget stabilisation funds provide a solid backstop to reinforce demand this year.
The broader picture is that China’s fiscal package isn’t aiming for quick, headline-grabbing results. By focusing on debt restructuring, bolstering local governments and carefully opening the door for targeted spending, this package is setting the stage for a sustainable recovery.
And what truly makes this package distinctive is its flexibility. Policymakers have left room to scale up or adjust the measures if needed. For instance, if consumer confidence needs a further boost, China could look at boosting public sector salaries, injecting funds directly into households, or increasing transfer payments to low-income families.
While western stimulus packages often prioritise immediate boosts, China’s approach is more like a marathon than a sprint. If managed well, this path can help China make its economic framework more durable and resilient in the longer-term.
A longer version of this article appeared on FTChinese.com
Read the full article here