The market has misunderstood the situation: this stimulus is much larger than expected; it doesn't fall short or even align with previous predictions!

Initially, when the stimulus plan was announced, the market saw a debt relief scale of 6 trillion yuan, perceiving it as underwhelmingThis led to a drastic 5% drop in A50 futures and a sharp decline of 200 points in the yuan’s exchange rate.

The key details are as follows:

1. We will increase the local government debt ceiling by 6 trillion yuan, aimed at replacing existing hidden debts and offering local governments more room to foster economic growth and safeguard people’s livelihoods.

2. The local government special debt limit will rise from 29.52 trillion yuan to 35.52 trillion yuan, an increase of 6 trillion yuan!

3. China will allocate 800 billion yuan annually from newly issued local government special bonds for five consecutive years

Coupled with this newly approved 6 trillion yuan debt ceiling, the total increase in local debt relief resources will reach 10 trillion yuan.

4. By the end of 2023, the national hidden debt balance is projected to stand at 14.3 trillion yuan.

Many people only remember the 10 trillion yuan figure without considering the specific details that preceded itIn short, this scale of stimulus significantly exceeds prior expectations.

Let’s compare previous expectations with the actual situation:

1. Debt Relief Limit:

Prior expectation: A 6 trillion yuan swap for local debt, referred to as "local debt relief".

Current measures: We are raising the local government debt limit by 6 trillion yuan.

This indicates that the debt relief limit remains unchanged

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It is neither increased nor decreased.

However, now it’s crucial to note that an additional provision states: China will arrange 800 billion yuan annually from these new local government special bonds over five yearsWith the approved 6 trillion yuan debt ceiling, the total local debt relief resources directly increased to 10 trillion yuan.

In conclusion, the overall debt relief limit for the coming years stands at 10 trillion yuan.

In comparison, the previous 6 trillion yuan debt relief limit versus the current 10 trillion yuan debt relief limit is far beyond expectations, exceeding by 4 trillion yuan.

2. Special Debt Quota:

Previous expectation: 4 trillion yuan special debt for purchasing idle land from developers and acquiring existing housing from the market.

Current measures: The limit for local government special debt will rise from 29.52 trillion yuan to 35.52 trillion yuan, a 6 trillion yuan increase!

Comparing the previous 4 trillion yuan with the current 6 trillion yuan shows this round of special debt stimulation is 2 trillion yuan more than expected!

3. Potential Net Stimulus Scale:

Understanding this fiscal stimulus hinges on the concepts of debt relief and the debt relief quota.

Debt relief essentially transfers the burden from local governments to the central government.

From the perspective of debt relief alone, while local government debts have been erased, central government debts have increased; thus, the overall debt scale (central + local government) remains unchanged.

Why pursue debt relief? Because local governments bear the heavy load of economic growth, their primary tool for spurring economic development is debt expansion.

However, due to fiscal discipline, local governments’ borrowing capacity is limited; surpassing a certain scale prohibits further borrowing.

In light of the central government's replacement of local debts, local entities gain borrowing leeway to facilitate economic growth—such as issuing special debts to support developers and revitalizing the real estate sector.

Among the stipulations for the 6 trillion, 4 trillion is set aside to aid developers and the real estate market, while the remaining 2 trillion permits local governments discretion regarding their use, including debt service expenditures and other outlays.

Altogether, the maximum overall stimulus actually amounts to 6 trillion yuan.

The current measures: debt relief at 10 trillion yuan, releasing 10 trillion yuan of borrowing capacity for local governments, leading to a total stimulus of 10 trillion yuan.

Out of this 10 trillion yuan, specified special bonds account for 6 trillion yuan, while the remaining 4 trillion is managed at the local government's discretion.

In terms of net stimulus amount, previous expectations were set at 6 trillion yuan versus the current 10 trillion yuan, with actual measures exceeding expectations by 4 trillion yuan.

The next question is: Is 10 trillion yuan enough?

Let’s first examine the overall scale:

Li Jianjun, speaking at the 2024 Financial Street Forum, shared that as of June 2024, the total local debt in China amounts to approximately 100 trillion yuan, with local government bond balances at 42.23 trillion yuan and urban investment bond debts at 57.16 trillion yuan.

Furthermore, the International Monetary Fund projects that by the end of 2023, explicit local government debt will represent 31% of GDP, while financing tool debts will account for 48%, with other governmental-related debts making up 13% of GDP.

The fund estimates that combined with central government debt, the total may reach 116 trillion yuan.

Now let’s take a look at the interest cost situation

In 2019, it was approximately 3.55%, and in 2020, around 3.39%.

This means that whether the total debt is 110 trillion or 116 trillion, the annual interest cost remains similar, hovering around 3 trillion to 4 trillion yuan.

Consequently, this 6 trillion or 10 trillion raised through debt financing is tantamount to the interest costs incurred.

Moreover, can leveraging solve the issues?

Regardless of whether the fiscal stimulus is capped at 6 trillion or 10 trillion, the essence revolves around leveraging through debt issuance.

However, the question persists: can debt issuance resolve problems?

Previously, the concept of a "debt gray rhino" was frequently discussed, encompassing the burden of debts on residents, enterprises, and local governments, all unable to repay principal and interest

This predicament even impacts banks, leading to cases like Baoshang Bank.

The core issue lies in excessive debt burdens; the inability to bear these burdens is precisely why the term "debt gray rhino" emerged.

Logically speaking, resolving debt issues generally demands a reduction of debt, which accurately reflects true "debt relief".

Transferring old debts without eliminating them and subsequently issuing new debts merely inflates the overall debt sizeIs it logical to assume this is an effective solution?

The real concern is an untenable debt burden; relying on new debt issuance will not remedy the debt crises, but rather exacerbate them

Essentially, it defers the underlying debt issues.

Ultimately, what is the essence of fiscal stimulus? It serves emergency relief, not a path to poverty alleviation.

Fiscal stimuli come with substantial side effects because they detach from market regulations, inevitably hindering efficiency.

Following the 4 trillion yuan stimulus initiative, inflation surged rapidly, creating an oversupply and overcapacity, with remnants lingering for years while attempting to eradicate past repercussions.

The significance of fiscal stimuli lies in reviving a stagnant economy; however, they do not address fundamental issues, and contrarily, they come at a cost.

The problems that existed before fiscal stimulus persist after its implementation and may even worsen.

Only by addressing these issues can fiscal stimulus hold any meaning.

Thus, regardless of perspective, despite the stimulus of 10 trillion yuan greatly exceeding expectations, it still falls short