Reuters reports that with an eye on the U.S. election, China is considering borrowing more than $1.4 trillion in additional debt in the next few years. | Wilnesh News

China is considering approving next week the issuance of more than 10 trillion yuan ($1.4 trillion) in additional debt over the next few years to revive its fragile economy, a fiscal package expected if Donald Trump wins the U.S. election Further support will be provided.

China’s top legislative body, the Standing Committee of the National People’s Congress (NPC), is seeking to approve a new fiscal package on the final day of its upcoming session that includes 6 trillion yuan, part of which will be raised through special sovereign bonds, sources said. November 4-8.

The debt worth 6 trillion yuan will be raised over three years including 2024, the source said, adding that the proceeds will be mainly used to help local governments deal with off-book debt risks.

The total amount planned to be raised through the issuance of special government bonds and local government bonds is equivalent to more than 8% of the output of the world’s second-largest economy, which has been hit hard by the protracted housing crisis and ballooning local debt.

Reuters confirmed for the first time that Chinese authorities are considering approving a 10 trillion yuan economic stimulus package, an amount that financial analysts have said in recent weeks they expect Beijing to consider.

The spending plans show that Beijing has adopted higher stimulus measures to boost the economy, although it is still not the bazooka that some investors have been calling for in 2008.

The central bank announced its most aggressive monetary support measures since the COVID-19 pandemic in late September. Weeks later, the government announced more fiscal stimulus without specifying the financial details of the plan, sparking intense speculation in global markets about the scale of the new spending.

The people declined to be named due to confidentiality restrictions.

The State Council Information Office and the press department of the National People’s Congress Standing Committee did not immediately respond to Reuters’ requests for comment.

Sources cautioned that the plan has not yet been finalized and could still change.

Tommy Xie, head of research for Greater China at OCBC Bank, said: “The current policy focus seems to be on resolving local government hidden debt first, then on stabilizing the financial system, and finally on supporting domestic demand.”

China’s top legislative body generally meets every two months, in the second half of even-numbered months. According to the Parliament’s 2024 work agenda released in May, a meeting of the Standing Committee is planned for October.

One of the sources said the upcoming meeting was initially planned for late October but was later rescheduled to early November.

Sources said the timing of the meeting coincides with the week of the U.S. presidential election on November 5, providing Beijing with greater flexibility to adjust the fiscal package, including the overall size, based on the election results.

Beijing is likely to announce a stronger fiscal package if Trump wins a second term as president, two sources said, as his return to the White House is expected to intensify economic headwinds in China.

Republican candidate Donald Trump has won recent polls, erasing much of the early advantage held by his Democratic rival, Vice President Kamala Harris. Trump has vowed to impose a 60% tariff on Chinese imports.

Sources said that as part of the latest fiscal package, the Standing Committee of the National People’s Congress is also expected to approve the issuance of all or part of special bonds of up to 4 trillion yuan in the next five years to purchase idle land and properties.

Local governments will be allowed to raise this amount on top of their usual annual issuance quotas, which primarily fund infrastructure spending. This year’s quota is 3.9 trillion yuan, and the 2023 quota is 3.8 trillion yuan.

The latest measures aim to enhance local governments’ ability to manage land supply and ease liquidity and debt pressure on local governments and real estate developers, they added.

Special-purpose bonds are off-budget debt financing tools used by Chinese local governments to raise funds that are often earmarked for specific policy goals such as infrastructure spending.

They added that if the National People’s Congress Standing Committee approves these issuances in full instead of in phases, the total size of the stimulus could increase to more than 10 trillion yuan. The average annual increase in central government debt reaches 2 trillion yuan, highlighting Beijing’s urgency to boost the economy.

At the end of 2023, China issued 1 trillion yuan of sovereign bonds to strengthen flood control infrastructure and achieve an economic growth target of about 5%.

Beijing had planned to issue 1 trillion yuan of special sovereign debt at the beginning of the year, but the amount is widely expected to increase as economic growth has fallen off target and economists say a long-term structural slowdown may be at play.

Still, the planned fiscal spending is lower than the firepower deployed in 2008, when Beijing’s 4 trillion yuan fiscal stimulus accounted for 13% of GDP in response to the global financial crisis.

The extra money fueled a frenzy in the housing market and led to unrestricted lending by local government financing vehicles, which local governments use to circumvent official borrowing limits.

Sources said China is also considering approving other stimulus measures of at least 1 trillion yuan as part of overall fiscal spending, such as trade-ins and consumer product updates to stimulate consumption.

Another 1 trillion yuan could also be raised through special government bonds to inject capital into large state-owned banks, one source and another person familiar with the matter said.

“Significant fiscal stimulus should boost confidence and support economic growth,” said Louis Koomis, chief Asia economist at S&P Global in Hong Kong.

“It appears that support for consumption remains limited. This means that we are still unlikely to see a significant improvement in economic growth prospects or that deflationary risks are overcome.”