Relief measures: A barista serves coffee at an outlet in Beijing. The central government should significantly expand its upgrade incentives for consumer products and equipment, a leading economist says. — Reuters
SHANGHAI: China needs to vastly step up its efforts to cleanse the balance sheets of the nation’s local governments, giving them the space needed to support consumer spending and strengthen the economy, one of the nation’s prominent economists says.
The central government should take on at least 20 trillion yuan or about US$2.7 trillion worth of local sovereign debt, David Li Daokui, an economics professor at Tsinghua University and a regular adviser on policy to Beijing, said in an interview.
The debt relief measures policymakers rolled out late last year aren’t strong enough, he said.
Burdened by debt loads accumulated during Covid-19 and China’s previous property and infrastructure boom, many local authorities have delayed payments to suppliers and withheld public workers’ paychecks, damaging the broader economy.
Li estimates regional authorities owe a total of 10 trillion yuan in arrears to contractors and civil servants.
That’s equivalent to 7% of China’s gross domestic product last year. To solve the problem, Li proposed that the central government sell more bonds and use the proceeds to buy regional authorities’ debt.
Provincial and municipal agencies could transfer assets to Beijing in exchange, he said.
A swap at a scale of 20 trillion yuan to 50 trillion yuan would be effective in relieving debt burdens around the country, allowing local authorities to better support consumers, according to Li.
This would also be helpful in the face of US President Donald Trump’s measures to curb Chinese exports, he added.
“Whether it’s pressure from Trump’s trade protection or from China’s own economic problems, the solution lies in fixing weak consumption,” Li said.
“The key is to reduce local governments’ contractionary behaviours.”
Encouraging domestic consumer spending may prove crucial to China this year.
Export growth, which has surged since the pandemic, is under threat from Trump’s tariffs along with rising trade tensions with the European Union and other locations around the world.
Weak domestic demand has led to persistent deflation, resulting in a downward spiral between residents’ income and corporate profits.
While local governments used to be a key driver of growth in the past, with big spending on infrastructure, they have turned into a drag in recent years as an historic property slump led to strained finances.
Many economists have called for the central government to increase borrowing, as China’s public debt-to-gross domestic product ratio remains low compared with other major economies.
But Beijing has so far resisted bailing out local authorities, worrying it will lead to moral-hazard risks, encouraging irresponsible borrowing in the future.
Local governments had over 47 trillion yuan in on-balance-sheet debt as of the end of 2024, according to official data.
On top of that, they have about 60 trillion yuan in so-called hidden debt, according to International Monetary Fund estimates.
The Finance Ministry in November unveiled a plan to allow local authorities to sell 10 trillion yuan in bonds to refinance their off-balance-sheet debt.
That’s only led to temporary relief, according to Li, who anticipates problems may surface again in the future.
The economist also called on the central government to significantly expand its “upgrade” incentives for consumer products and equipment.
He urged an expansion of 800 billion yuan to one trillion yuan from last year’s 300 billion yuan.
Even more effective would be handing out cash subsidies to households during major holidays, Li said. — Bloomberg
