China's $1.4 Trillion Economic Stimulus is No Stimulus
And the truth is, no $1.4 Trillion (10 Trillion Yuan) economy and consumption booster has been unleashed into the economy.
I finally studied China’s $1.4 Trillion stimulus package which was unveiled yday 🙏🙏
And the truth is, no $1.4 Trillion (10 Trillion Yuan) economy and consumption booster has been unleashed into the economy.
Rather, it’s a multi-year debt restructuring between Chinese Central and local Govts.
Let me explain in detail.
China’s local Govts are sitting on a mountain of “Hidden Debt” 📛📛
Why hidden? This is debt that these Govts hold via their units/companies.
This can be better understood with the Indian example.
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This is similar to NHAI or Food Corporation of India here.
Their borrowings were not included in the Govt’s fiscal deficit calculations till COVID happened
Post-COVID though, the Modi Govt did a bold and positive deed to bring all that hidden debt into its own when computing the fiscal deficit, helping bring transparency to the true health of the Govt’s financials
Otherwise, for decades before that, no Govt gave the true picture. I know some folks will be triggered, but no harm in acknowledging the good things the Modi regime has done 🙏🙏
Coming to the point, alas, China has continued with the old practice.
Outcome?
Globally, the hidden debt in the Chinese economy has been estimated to be as high as 60 Trillion Yuan
And a massive chunk with local Govts, whose primary source of earnings to maintain those debts and pay interest in time was the sale of land and real estate
But, with the collapse of Chinese real estate in the last few years, local Govts saw that source of earnings evaporate 📛📛
And this impacted their ability to service the massive debts, public and hidden alike.
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And this is the context in which the fresh 10 Trillion Yuan stimulus comes in.
It comes in two segments.
Xi Jinping’s Govt shall move 2 Trillion Yuan of local Govt debt to its own books in each of the next 3yrs
And the Chinese Govt shall also allow the local Govts to borrow as much as 4 Trillion Yuan, spread over a 5yr period!
Thus, effectively, the stimulus is more about diffusing the ticking time bombs that many of China’s local Govts had turned into.
Outcome?
This will enable local Govts to spend and boost the economy more freely, year by year.
But, at the same time, this will increase the central Govt’s debt significantly
And, as a result, Xi Jinping will be spending more in interest payments than on infra or other avenues in the years to come
This is why I said above, that this is a multi-year debt restructuring and not an economic stimulus of any kind.
Did you know this? Or that fact about NHAI and FCI’s hidden loans not being included in Govt’s fiscal deficit measurements until Covid?
Best,
Jayant Mundhra