Restructuring Dilemmas, Part 2: Local Governments Seeing Red (Lines)

Pressure from local government debt is forcing Beijing into a dilemma between stabilization of the economy and structural adjustment.  While media discussion of fiscal stimulus is growing, the vast majority of China’s provinces already exceed government-established “red lines” of indebtedness as of 2017. Local governments have frozen infrastructure investment projects to control debt, which has contributed to the current economic slowdown. China has some fiscal space for counter-cyclical policy but cannot use it without exacerbating the debt problem. In the short run, Beijing is likely to combine permitting defaults and bailouts to manage local financial stress, but any large fiscal stimulus package is off the table.

Posted October 19, 2018
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