On Friday, China’s top legislature approved a State Council bill to raise the local government debt ceiling by 6 trillion yuan, replacing existing “hidden debts.”

The Standing Committee of the 14th National People’s Congress (NPC) announced that under the new agreement, the debt ceiling for local government special debt will increase to 35.52 trillion yuan from 29.52 trillion yuan by the end of 2024.

This change is expected to reduce the hidden debts that local governments in China must manage by 2028. from 14.3 trillion to 2.3 trillion yuan.

Before the announcement, VanEck portfolio manager Alice Shen described China's upcoming fiscal policy package as "strong," especially in light of Donald Trump's re-election and his proposed 60 percent tariff on all Chinese imports.

"This package is aimed at indebted local authorities who have been hit hard by the property downturn over the past few years," she told InvestorDaily.

"The central government is stepping in to help them get out of this sluggish environment and is also looking to support the banks with recapitalization."

Shen stressed the importance of reviving China's domestic consumption, noting that the government has been cautious since the pandemic, introducing various fiscal and capital intervention policies. She said the latest fiscal package underscores the government's urgency to meet its 5 percent gross domestic product (GDP) growth target for the year.

"We urge that domestic consumption is a relatively weak part of the economy after the pandemic and we think the central government needs to do something about it," she told InvestorDaily.

She added that due to the long-term decline in property, "people are still reluctant to open their wallets".

The stabilization of China's real estate sector and continued infrastructure investment are expected to play a key role in boosting Australia's resources sector, given China's status as Australia's largest trading partner.

"With central government intervention to deal with unsold properties and stabilize the property market, this could boost demand for Australian iron ore," Shen said.

Shen also highlighted China's investment in advanced technologies, such as electric vehicles, battery cells and solar panels, which will increase demand for raw materials such as copper.

"Australia could also potentially benefit from this in the coming years," she said.

Although "the bigger the package, the better," Shen cautioned that the size of China's incentives will be less important than the follow-up.

This includes helping indebted local governments to generate alternative revenue streams away from property sales, buying unsold apartments to help clear housing stock, and implementing a larger program to encourage consumption.

Tariffs

While it remains uncertain whether Trump's proposed 60 percent tariff on all Chinese imports will be implemented, Shen noted that Australia's domestic resources sector could face knock-on effects.

“A 60 percent tariff is what Trump said in his campaign; whether or not he will actually enforce it still remains uncertain. We will all have to wait and see,” Shen said.

However, she noted that, historically, imports of Chinese goods into the U.S. have declined during Trump's first term.

Meanwhile, China is exploring opportunities to significantly increase its exports to emerging markets, including the ASEAN and BRICS countries.

"I think there will be some adverse impacts on China's GDP growth over the next few years, but that still remains uncertain and we will have to analyze as the announcement comes whether Trump will actually do something [regarding tariffs].”