AnalysisChina doubles down on tried, tested infrastructure spending, but is it still the right fit in a debt crisis?

Central financial work conference vowed to set up a long-term mechanism to resolve debt risks on Tuesday after Beijing’s fiscal revision and treasury bond approval last week

Analysts say raising the budget deficit ratio by approving the issuance of 1 trillion yuan (US$137 billion) of sovereign bonds does not address the source of the problems

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China’s budget deficit ratio to be raised to about 3.8 per cent of gross domestic product by approving 1 trillion yuan (US$137 billion) issuance of sovereign bonds. Photo: EPA-EFE

Published: 7:00pm, 1 Nov 2023Updated: 5:59pm, 2 Nov 2023

For many years, China’s local governments were the envy of the world, with unlimited funds available to spend on bridges, high-speed railways and roads.

However, the growing debt burden on the world’s second-largest economy has raised questions over how long the tried and tested investment-led model can be sustained.

Local government debt was highlighted as the top two risks, along with the property crisis, at the twice-a-decade central financial work conference, which concluded on Tuesday.

Policymakers vowed to “optimise the debt structure for central and local governments”, but did not give away details of a debt relief plan.

Last week, the central government made one of the biggest changes to the national budget in years, along with the issuance of 1 trillion yuan (US$137 billion) in government bonds.

It isn’t the stepping up in taking on at least part of local government debt and a restructuring of outstanding debt that we’d like to see

Li Daokui

Although Beijing made it clear that the funds would be focused on reconstruction of areas hit hard by natural disasters, the rare revision of the budget deficit to 3.8 per cent from 3 per cent has been viewed as an exceptional measure given that the economy has improved.