China’s stimulus falls short, as a showdown with Trump looms

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Subscribe to enjoy similar stories. ECONOMIST SOMETIMES say that China suffers from the three Ds: debt, deflation and poor demographics. America’s presidential election added a fourth: Donald Trump, who has threatened to slap high tariffs on Chinese exports when he returns to the White House.

To counter these dangers, investors had hoped China would announce a decisive fiscal rescue package after a legislative meeting on November 8th. China’s leaders, though, seem stuck in a cautious crouch. After the meeting, the finance ministry unveiled a new plan to tackle one of the Ds: debt.

But it shared no new measures that would help it beat back deflation. Lan Fo’an, China’s finance minister, said that local governments would be allowed to issue extra bonds worth trillions of yuan to replace riskier “hidden" debts. These hidden liabilities typically belong to local-government financing vehicles (LGFVs), quasi-commercial infrastructure firms sponsored by city and provincial authorities.

The debts of LGFVs totalled about 60trn yuan ($8.6trn) at the end of 2022, about one-fifth of it risky, according to Goldman Sachs, a bank. To refinance these debts, local governments will be able to issue bonds worth up to 10trn yuan over the next five years. Hidden debts have been a nagging worry for China’s rulers and investors for the past 15 years.

Barred from issuing many bonds of their own, local governments raised money through LGFVs instead. Lou Jiwei, China’s formidable finance minister from 2013 to 2016, tried to bring these debts under control during Xi Jinping’s first term as president. His approach set the precedent for the latest initiative.