On Friday, China’s top legislature approved a state council bill to raise the ceiling on local government debt by 6 trillion yuan, replacing existing “hidden debts”.
The Standing Committee of the 14th National People’s Congress (NPC) announced that, under the new arrangement, the debt ceiling for special local government debt will increase to 35.52 trillion yuan from 29.52 trillion yuan by the end of 2024.
This change is expected to reduce the hidden debts that China’s local governments need to manage by 2028 from 14.3 trillion to 2.3 trillion yuan.
Ahead of the announcement, VanEck’s portfolio manager, Alice Shen, described China’s upcoming fiscal policy package as “forceful”, especially in light of Donald Trump’s re-election and his proposed 60 per cent tariff on all imports from China.
“This package is targeted at indebted local governments, which have been heavily impacted by the property downturn over the past few years,” she told InvestorDaily.
“The central government is stepping in to help lift them out of this sluggish environment and is also looking to support banks with recapitalisation.”
Shen stressed the importance of revitalising domestic consumption in China, noting that the government has been cautious since the pandemic, rolling out various fiscal and equity intervention policies. She said the latest fiscal package underscores the government’s urgency in achieving its 5 per cent gross domestic product (GDP) growth target for the year.
“We have been calling that domestic consumption has been relatively a weak part of the economy post-pandemic and we do think that the central government should do something about it,” she told InvestorDaily.
She added that because of property’s long-term downturn, “people were not willing to open up their wallets just yet”.
Stabilising China’s property sector and continuing infrastructure investments are expected to play a pivotal role in boosting Australia’s resources sector, given China’s status as Australia’s largest trading partner.
“With the central government stepping in to address unsold property units and stabilise the property market, this could increase demand for Australian iron ore,” Shen said.
Additionally, Shen highlighted China’s investment in advanced technologies, such as electric vehicles, battery cells, and solar panels, which will increase demand for raw materials like copper.
“Australia could potentially benefit from that, too, in the coming years,” she said.
Although “the bigger the package, the better”, Shen warned that the size of China’s stimulus will be less important than its follow-through action.
This includes supporting indebted local governments to generate alternative revenue streams, away from property land sales, purchasing unsold apartment units to help clear housing inventory, and implementing a larger scale program to encourage consumption.
Tariffs
While it remains uncertain whether Trump’s proposed 60 per cent tariff on all Chinese imports will be implemented, Shen noted that the Australian domestic resources sector could face indirect effects.
“A 60 per cent tariff is what Trump claimed in his campaign; whether he will actually impose it or not still remains uncertain. We will all have to wait and see,” Shen said.
However, she noted, according to historical data, US imports of Chinese goods declined during Trump’s first term in office.
Meanwhile, China is exploring opportunities to significantly increase its exports to emerging markets, including the ASEAN countries and BRICS.
“I think there would be some adverse impacts to China GDP growth in the next few years, but it still remains uncertain and we would have to analyse as the announcement comes whether Trump will actually do something [regarding tariffs].”
