China Considers Major Debt Issuance to Revive Economy

(Reuters) – China is contemplating the approval of over 10 trillion yuan ($1.4 trillion) in additional debt next week as part of an effort to rejuvenate its fragile economy, according to two sources familiar with the situation.

The fiscal package may be enhanced if Donald Trump wins the presidential election on November 5, the sources indicated.

Analyst Comments on the Stimulus Plans

Tommy Xie, Head of Greater China Research, OCBC Bank, Singapore

"The current policy priorities focus first on local government hidden debt, then on financial system stability, and finally on supporting domestic demand.

My main concern is how the debt swap will be financed. If local governments largely finance the swap, converting hidden debt into on-balance-sheet obligations could lower interest expenses. However, this alone may not lead to increased local government spending without a debt transfer from local to central governments.

This exclusive news is pivotal as it might address my major concern. I believe long-term special bonds are crucial to this strategy."

Gary Ng, Senior Economist for Natixis, Hong Kong

"The stimulus size is nearing market expectations, but it can serve more as a painkiller than a growth booster.

To assess the growth impact, we need to monitor the bond issuance timeline and funding usage; 4 trillion yuan could significantly aid in purchasing idle units and mitigating risks. Nevertheless, the specifics regarding the amount dedicated to debt swaps and spending remain uncertain. So, while it's promising for confidence, its economic impact may be less significant than it appears."

Alvin Tan, Head of Asia FX Strategy, RBC Capital Markets, Singapore

"Despite the substantial amount, how the debt will be utilized is critical for understanding its fiscal impact on economic demand and growth.

Signs indicate that the majority of China’s upcoming fiscal package will focus on local government debt restructuring and banking sector recapitalization. If most of the 10 trillion yuan is spent on debt swaps and banking sector support, the net fiscal impact will be smaller than the headline amount suggests since those actions do not directly stimulate demand."

Louis Kumis, Chief Asia Economist, S&P Global, Hong Kong

"A significant fiscal stimulus should boost confidence and promote economic growth.

Most proceeds from extra bond issuance will likely address local government debt issues, potentially allowing them to be less frugal in spending.

Investing in idle land and property can help, though weak sentiment and a significant stock of unsold housing may hinder market stabilization in the near term.

Support for consumption remains modest, indicating little hope for substantial economic growth improvement or resolution of deflation risks."

Lynn Song, Chief Greater China Economist, ING, Hong Kong

"If a 10 trillion yuan package materializes as expected, it should satisfy most investors.

This aligns with our forecasts for fiscal stimulus of around 2-4 trillion yuan annually.

If 6 trillion yuan is allocated for local government bonds and 4 trillion yuan for property purchases, it would significantly benefit the property sector, especially with prompt deployment.

Housing inventories have started to decline, and accelerated purchases could expedite achieving a healthier inventory level.

The multiplier effect of this fiscal stimulus will naturally be lower compared to previous infrastructure-focused packages but can tackle key issues for the Chinese economy, which markets will welcome if approved.

In the future, markets will closely watch for further policy measures to stimulate consumption, a repeatedly flagged priority."

Linda Lam, Head of Equity Advisory for North Asia at UMP, Hong Kong

"If that figure is accurate, it leans towards the high end of estimates but is within expected ranges. The consensus is that a fiscal package must be part of the solution.

The market has long awaited a concrete number.

Implementation will be critical, heavily relying on monetary transmission and consumption power."

(This story has been corrected to note Natixis, not Nations, in paragraph 8.)