China's Finance Ministry Prioritizes Local Debt Over Economic Boost

China's Ministry of Finance recently held a press briefing, highlighting its focus on resolving local government debt issues rather than providing the economic stimulus markets were hoping for. Finance Minister Lan Fo'an outlined four key measures to support local governments in managing debt risks. Only after these points did he mention that the country is considering increasing its debt and deficit. Experts like Robin Xing, chief China economist at Morgan Stanley, agree that addressing local government financing struggles is a top priority. They expect the central government to play a bigger role in debt restructuring and stabilizing the housing market. However, they predict that increasing support for consumption and social welfare spending will happen gradually. The real estate market's downturn has significantly reduced local governments' revenue. Even before the pandemic, many were struggling financially. Slow economic growth and weak consumption have further increased calls for more fiscal stimulus.

The Ministry of Finance's announced policies are more about tackling structural issues, according to the Chinese economic think tank CF40. These measures aren't aimed at tackling macroeconomic issues like insufficient demand or falling prices through traditional Keynesian-style fiscal expansion. CF40 estimates that China doesn't need additional fiscal funding to meet its full-year growth target of around 5%, as long as the already announced spending is implemented by the end of the year. Finance Minister Lan revealed that local governments can use 400 billion yuan ($56.54 billion) in bonds to support payroll and basic services. He also mentioned a future plan to address hidden debt in local governments, although the timeline wasn't specified. Lan claimed that hidden debt levels at the end of 2023 were half of what they were in 2018. Historically, local governments have been responsible for over 85% of expenditures but only receive about 60% of tax revenue. The International Monetary Fund has noted that constrained local government finances contribute to downward pressure on prices. In September, China's core consumer price index rose by just 0.1% year-over-year, the slowest rate since February 2021. Morgan Stanley sees resolving local government debt problems as crucial to stopping the decline in prices, almost as important as stimulus aimed at boosting demand.

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