China should issue 30 trillion yuan (US$4.2 trillion) in treasury bonds to swap local governments’ hidden liabilities to re-energise growth momentum and cut off financial risks at their root, a Beijing-based think tank has proposed.
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Such a move, combined with a few trillion yuan worth of additional bonds to shore up the property market, boost consumption and remove excessive industrial capacity, would be a strong step toward resolving China’s local-level debt and real estate crises once and for all, according to a report released by Tsinghua University’s Academic Centre for Chinese Economic Practice and Thinking (Accept).
“The economy is beginning to show signs of stabilisation, but significant risks still remain beneath the surface,” Liu Peilin, the centre’s chief research fellow, said while discussing the report at a macroeconomic forum hosted by the institute on Wednesday. “At the root of the problem is high local government debt, which has disrupted economic and financial operations.
“What’s needed is a comprehensive policy package – more specifically, a package of more proactive fiscal measures.”
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However, there are still tens of trillions of yuan worth of local-level debt unidentified by the ministry as government liabilities, but they remain a ticking debt bomb because they are owed by state-owned enterprises, local financing vehicles or exist in other forms.
