The Chinese Prime Minister, Li Qiang, recently expressed full confidence in achieving the economic targets for 2024, with a GDP growth of around 5%. However, low economic indicators and the return of Donald Trump to the White House are raising concerns about China’s economic growth projections.
During his election campaign, Trump threatened to impose high tariffs – up to 60% – on Chinese imports. In this context, fears of a possible escalation in political and economic tensions between the two superpowers have raised doubts about the challenges China will face in the future.
Shortly after the election results, China announced a new stimulus package aimed at the economy, which includes a considerable increase in public debt issuance to support regional governments, low-income citizens, the real estate market, and state banks.
At the end of a five-day meeting of China’s top legislative body, the Standing Committee of the National People’s Congress, a plan of 10 trillion yuan was approved to strengthen the economy, allowing local governments to refinance their debt.
According to the Finance Minister, Lan Fo’an, 6 trillion yuan in loans will be available over three years to help regional governments resolve what is called “hidden debt.” These debts are typically incurred by local governments through high-risk financing, backed by cities or provinces.
Local governments will also have access to a separate quota of 4 trillion yuan, in the form of special local bonds, over five years, aimed at reducing their debt holdings.
Alicia Garcia-Herrero, Chief Economist for Asia-Pacific at the investment bank Natixis, highlights the ambitious scale of the initiative, which offers additional resources for restructuring local government debt: “This was what we expected because we wrote even before the Congress began that there would mainly be recognition of the hidden debt. This is not really a stimulus. It is mainly risk management; to avoid systemic risk and the potential default of a local government financial vehicle, and its consequences for the banking sector,” Garcia-Herrero points out, concluding: “We will see more of the local governments’ official debt becoming public debt; thus, China’s overall official debt level will increase.”
The economist finds the focus on “cleaning up” the hidden debt “disappointing,” but “inevitable.” Without this “cleanup,” any economic stimulus would be wasted, because if these bank losses are “not recognized… they could create financial stability problems.”
At the end of 2023, China had a hidden debt balance of 14.3 trillion yuan, now trying to reduce this figure to 2.3 trillion yuan by 2028. “Many local governments, or at least their financial vehicles, could default. Even some smaller banks might default,” Garcia-Herrero explains. Despite the large amount of the stimulus, the economist believes it will be allocated slowly, perhaps at a “pace of 2 trillion yuan per year, or 4 trillion next year,” due to underlying problems in the Chinese real estate market. The Chinese authorities “first need to clean up the real estate market by buying back unfinished and unsold units. It’s a lot of money they need to spend. For the recapitalization of the banks, the estimate circulating is about a billion yuan just for the major state commercial banks,” she warns.
“Much of that cleanup will happen with this money. Banks will then be in a position to lend. In short, China is stimulating cleanup, risk reduction, and financial stability. It’s not really a growth push.” Due to these factors, Garcia-Herrero does not foresee much higher growth in the Chinese economy next year: “Maybe almost the same.”
People “think China is highly competitive. Some sectors are, but the overall economy is losing productivity, basically due to poorly distributed savings.” The economist concludes that the Central Government “really needs to do something to change the current situation,” but as long as it continues to “use people’s savings inefficiently, it will not be able to increase consumption.”
Bottlenecks
Zhiqun Zhu, professor of political science and international relations at Bucknell University, emphasizes that, in addition to immediate financial injections, long-term strategies are necessary to address challenges that further complicate economic issues, such as population aging. These stimulus measures, he notes, “are short-term policies to boost economic growth.” However, “in the long run, China needs to face the bottlenecks of its economic development, promote innovation, protect entrepreneurship, reduce wealth inequality, and stimulate domestic consumption.”
While the focus is on immediate economic relief, “structural reforms and greater openness to the world would be better options to deal with these challenges,” the analyst argues, fearing that interventionist policies may not effectively address these structural issues.
Trump Effect
The Republican victory in the United States introduces new problems. Zhu warns that it is in both Xi and Trump’s interest to handle relations between the two countries peacefully: “They know each other and, apparently, respect each other. If they find a middle ground and reach an agreement, they can avoid a devastating trade war, which would actually harm both countries and disrupt the global economy.” More importantly, he argues, “it does not solve all of the United States’ economic problems.”
In the event of an escalation in the trade war, Zhu believes that additional punitive tariffs, beyond influencing the volume of China’s foreign trade, would impact economies so closely tied to the external market, such as Macau and Hong Kong: “Chinese exports to the US will decrease even more with the imposition of high tariffs. Given that the economies of Macau and Hong Kong are closely linked to the Mainland, any punitive measures from the US on the Chinese economy will negatively affect [the two cities],” Zhu warns.
Charles Choy, Secretary-General of the American Chamber of Commerce in Macau, prefers to recognize the success of American investments in Macau’s gaming and tourism industries over the past two decades, expressing optimism despite geopolitical tensions: “The Chamber of Commerce has always been a facilitating bridge to promote trade, collaborations, and investments between Macau and the United States. We hope to continue these encouraging trade relations with the new Administration,” he tells PLATAFORMA.
