China unveils 10 trillion yuan package to counter debt crisis

China is contemplating launching a substantial fiscal package valued at over 10 trillion yuan (approximately £1.16 trillion) to support its weakened economy. Sources indicate that the Standing Committee of the National People's Congress (NPC) is considering approving the plan during a meeting scheduled for 4-8 November.

The package includes the issuance of special treasury bonds to raise part of the necessary funds. The proposed measures would primarily be allocated to support local governments in managing hidden debts and financial issues.

A package valued at 8% of China's GDP

According to the plan, 6 trillion yuan is expected to be raised over the next three years, commencing in 2024. The overall value of the proposed package represents more than 8% of China's GDP, the world's second-largest economy, which is currently grappling with a real estate market crisis and increasing local government debt.

Reuters confirmed that Chinese authorities are seriously considering approving a stimulus package of such magnitude. This decision reflects Beijing's inclination to introduce substantial fiscal support, although not on the same scale as during the 2008 global financial crisis. The Chinese central bank has already announced the most significant monetary support since the COVID-19 pandemic in September.

Sources familiar with the matter, due to confidentiality, note that the plans may still change. The priorities are managing hidden local government debt, financial system stability, and supporting domestic demand, indicated Tommy Xie, head of China research at OCBC Bank, as reported by Reuters.

According to the NPC's agenda for 2024, the November session was initially scheduled for late October. The shift to the first week of November allows Beijing to adjust its fiscal strategy in response to the situation following the US presidential elections, which will occur on 5 November.

Reuters reports that China may increase the fiscal package if Trump wins the election, which could signal a rise in economic tensions. The Republican candidate has announced imposing 60% tariffs on imports from China, and his polling numbers have recently increased.

As part of the fiscal package, the NPC is also expected to approve the issuance of special-purpose bonds worth up to 4 trillion yuan for the purchase of land and real estate. Local authorities will be able to acquire these funds in addition to the usual annual limit, which primarily finances infrastructure and was 3.9 trillion yuan in 2023. This initiative aims to strengthen the financial liquidity of local governments and ease pressure on real estate developers.

The fiscal package may also feature initiatives to stimulate consumption, such as subsidies for replacing household products and equipment, and an additional 1 trillion yuan in the form of special treasury bonds to bolster the capital of the largest state banks.

- Significant fiscal stimulus should boost confidence and support economic growth - remarked Louis Kumis, chief Asia economist at S&P Global in Hong Kong. However, he added that the scale of consumer support is still moderate, suggesting that economic recovery may be limited and the risk of deflation not entirely eliminated.