(Bloomberg) -- China needs to vastly step up its efforts to cleanse the balance sheets of the nation’s local governments, giving them the space needed to support consumer spending and strengthen the economy, one of the nation’s most prominent economists said.
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The central government should take on at least 20 trillion yuan ($2.8 trillion) worth of local sovereign debt, David Li Daokui, an economics professor at Tsinghua University and a regular adviser on policy to Beijing, said in an interview. The debt relief measures policymakers rolled out late last year aren’t strong enough, he said.
Burdened by debt loads accumulated during Covid and China’s previous property-and-infrastructure boom, many local authorities have taken actions including delaying payments to suppliers and withholding public workers’ paychecks — damaging the broader economy. Li estimates regional authorities owe a total of 10 trillion yuan in arrears to contractors and civil servants. That’s equivalent to 7% of China’s gross domestic product last year.
To solve the problem, Li proposed that the central government sell more bonds and use the proceeds to buy regional authorities’ debt. Provincial and municipal agencies could transfer assets to Beijing in exchange, he said.
A swap at a scale of 20 to 50 trillion yuan would be effective in relieving debt burdens around the country, allowing local authorities to better support consumers, according to Li. This would also be helpful in the face of US President Donald Trump’s measures to curb Chinese exports, he indicated.
“No matter whether it’s pressure from Trump’s trade protection or from China’s own economic problems, the solution lies in fixing weak consumption,” Li said. “The key is to reduce local governments’ contractionary behaviors.”
Encouraging domestic consumer spending may prove crucial to China this year. Export growth, which has surged since the pandemic, is under threat from Trump’s tariffs along with rising trade tensions with the European Union and other locations around the world. Weak domestic demand has led to persistent deflation, resulting in a downward spiral between residents’ income and corporate profits.
While local governments used to be a key driver of growth in the past, with big spending on infrastructure, they have turned into a drag in recent years as an historic property slump led to strained finances.