China Needs Drastic Local Government Debt Relief to Boost Economy

China Needs Drastic Local Government Debt Relief to Boost Economy

China must significantly accelerate efforts to address its local government debt crisis to stimulate consumer spending and bolster economic growth, according to prominent Chinese economist David Li Daokui. Current debt relief measures are insufficient, necessitating a more aggressive approach.

Li, a Tsinghua University economics professor and frequent government advisor, suggests the central government should assume at least 20 trillion yuan ($2.8 trillion) of local government debt. This intervention is crucial because heavy debt burdens, accumulated during the Covid pandemic and previous infrastructure booms, have hampered local governments’ ability to support the economy.

The Crushing Weight of Local Government Debt

The current situation sees many local authorities delaying payments to suppliers and withholding public worker salaries – actions that negatively impact the broader economy. Li estimates outstanding payments to contractors and civil servants total 10 trillion yuan, a staggering 7% of China’s 2024 GDP. This substantial debt overhang restricts local governments’ ability to invest in public services and stimulate consumer demand.

A Proposed Solution: Debt Swap and Asset Transfer

Li proposes a solution: a large-scale debt swap. The central government would issue bonds and use the proceeds to purchase local government debt. In return, provincial and municipal agencies would transfer assets to the central government. This strategic move would effectively alleviate the financial strain on local governments.

Li suggests a swap ranging from 20 to 50 trillion yuan would significantly reduce debt burdens nationwide, enabling local authorities to better support consumer spending. This proactive approach would also help mitigate the impact of trade tensions and protectionist measures.

Focusing on Consumption as the Key to Economic Recovery

Stimulating domestic consumption is paramount for China’s economic health. Export growth, previously a strong driver, faces headwinds from global trade tensions. Weak domestic demand has contributed to deflation, creating a vicious cycle impacting both household income and corporate profits. Addressing local government debt is crucial to breaking this cycle.

From Growth Engine to Economic Drag

Historically, local governments fueled growth through infrastructure spending. However, the recent property market downturn has severely strained their finances, turning them from an engine of growth into a drag on the economy. Resolving the debt crisis will allow local governments to resume their role as vital contributors to economic expansion.

Conclusion: The Urgent Need for Decisive Action

China’s economic future hinges on addressing its local government debt crisis. A bold, decisive approach, like the debt swap proposed by Li, is necessary to unleash the spending power of local governments and revitalize the economy. By prioritizing consumer spending and removing the constraints of excessive debt, China can navigate current economic challenges and ensure sustainable growth.

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