China recently unveiled a $1.4 trillion support plan to rescue local governments struggling with debt, marking a significant step in efforts to boost the country’s economic growth. The plan comes after a series of smaller steps taken in September that were deemed insufficient by economists to address China’s slow economic growth.

The Chinese government’s decision to pass this massive support plan is a response to the challenges faced by many local governments in China, which have accumulated significant debts that have made it difficult for them to meet their financial obligations. In an effort to address this issue, local governments have been granted permission to refinance their debts under the newly announced plan.

The moves taken by China’s leaders are crucial at a time when the global economic landscape is evolving, particularly with the election of Donald J. Trump as the President of the United States. Trump’s statements regarding adding extra taxes on Chinese goods have raised concerns about potential trade tensions between the two economic powerhouses.

The challenges facing China’s economy in recent years have been multifaceted. A slowdown in the real estate market, which has historically been a key driver of wealth for Chinese families, has contributed to reduced consumer spending. Home prices have been declining steadily over the past few years, resulting in a rise in foreclosures and decreased economic activity in the sector.

Moreover, local governments in China have been burdened with substantial debt levels, which they have incurred through borrowing to fund infrastructure projects and other initiatives aimed at driving economic growth. The Covid-19 pandemic further exacerbated these debt levels as governments sought to stimulate economic activity through increased borrowing.

Despite the mounting economic challenges, the Chinese government had been hesitant to implement sweeping policy changes to address the issues at hand. Traditionally, Beijing has favored government-led growth over direct stimulus measures. However, in September, the government took decisive action to facilitate increased borrowing for individuals and businesses, signaling a shift in approach.

The recently announced support plan by China includes measures to allow the government to borrow additional funds over the next few years, aimed at easing financial pressures on local governments. By refinancing debts with high-interest rates, local governments can improve their cash position and alleviate some of the financial strain they are facing. However, economists caution that these measures may only address a portion of the overall debt burden faced by local governments.

One of the major challenges highlighted by experts is the presence of undisclosed debts held by local governments, which are not accounted for in official budgets. The International Monetary Fund has estimated the value of this “hidden” debt to be significant, posing additional risks to China’s financial stability.

Victor Shih, a financial and political expert at the University of California, San Diego, has raised concerns about the efficacy of the current measures in addressing the underlying issues in China’s economy. He points out that while the debt swap initiative may provide some temporary relief, it may not be sufficient to stimulate long-term economic growth.

Additionally, Wang Tao, a top economist at UBS, has emphasized that the current measures do not fundamentally address the root causes of the debt problem faced by local governments. While the recent stimulus measures have provided some short-term relief, a more comprehensive strategy is needed to address the structural challenges in China’s economy.

Despite the initial positive impact of the government’s stimulus measures on the stock market and economic growth, some analysts remain skeptical about the long-term effectiveness of these initiatives. Larry Hu, chief China economist at Macquarie Group, notes that the stimulus may fall short in boosting demand in the housing market, highlighting the need for more substantial interventions.

Looking ahead, the outcomes of the Central Economic Work Conference, scheduled to take place next month, will shed light on the government’s future economic policy direction. While further stimulus measures may be on the horizon, the underlying structural issues in China’s economy remain unresolved, requiring a more comprehensive approach to address long-term challenges.

In conclusion, China’s recently announced $1.4 trillion support plan represents a significant step towards addressing the economic challenges faced by local governments. However, more needs to be done to tackle the root causes of the debt burden and drive sustainable economic growth in the long run. As China navigates a complex economic landscape, strategic policy decisions will be vital in shaping the country’s economic trajectory in the coming years.