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China, the world’s second-largest economy, announced a weeks-awaited fiscal stimulus package. The package, which consists of two tranches worth 6 and 4 trillion yuan and will last until the end of 2026 and 2028, aims to indirectly restructure and reduce the debt of local governments rather than helping consumers.
The presidential election was awaited.
As is known, China waited for the end of the US election for this financial package. New President Donald Trump’s proposed high customs duties on China will also have a profound impact on China’s fiscal stimulus package, it said.
The 6 trillion yuan package, the first part of the fiscal stimulus package, will actually be a new borrowing quota for local governments. Debts of local governments, which are usually kept off the official balance sheet and known as “hidden debt”, will be further disclosed. This will facilitate debt restructuring and long-term repayments. This quota will increase from 2 trillion yuan annually to 6 trillion yuan by the end of 2026.
Why hidden debt?
There are areas in China where local governments are prohibited from borrowing directly. It enables local governments to borrow money through “local government debt instruments”. Debts are described as “hidden debts” and are usually off the balance sheet.
The other part of the package, 4 trillion yuan, will be used to reduce hidden debts of local governments through bonds. The 4 trillion yuan worth of previously approved bonds will be used to exchange classified loans. The support period for this part of the package will continue till the end of 2028.
This aspect of the economy is expected to stabilize at least as credit becomes more transparent and spreads over longer periods with lower interest rates.
“There is no direct effect”
Experts say the fiscal package is not as big as expected and will not have a direct impact on the economy as it will replace hidden debt.
Finance Minister Lane also said that policies like purchasing unsold public sector flats and houses and taking back residential land from real estate developers are also on the way.
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