China unveiled a $1.4 trillion stimulus plan on Friday to bolster the sluggish economy by helping local governments get out from underneath crushing debt, but a top economist says the plan failed to address a crucial debt problem, according to a report.
The Standing Committee of the National People's Congress authorized the package on Friday with an eye toward reducing "hidden" debt, which is kept off the books, that has become a drag on the world's second-largest economy.
The plan calls for allowing local governments to borrow about $838 billion over three years and an additional $539 billion over five years, the New York Times reported.
It would allow the governments to free up cash by refinancing their higher-interest loans, allowing them to catch up on paying wages that would spur middle-class spending, the report said.
Wang Tao, chief China economist at Swiss bank UBS, said the plan fails to fix the underlying problem.
"It does help to significantly reduce the debt service payment issue in the next few years, but does not solve the local government debt issue," Wang said told the New York Times.
"In September, China's central bank cut short-term interest rates and rates on existing mortgages, reduced minimum down payments for housing purchases and freed the country's state-controlled commercial banks to lend more, including to promote stock purchases," the New York Times said.
But while the stimulus buoyed the struggling stock market it is unlikely to energize the flailing housing market, Larry Hu, chief economist for Macquarie Group, told the newspaper.
"For that purpose, we need a more sizable stimulus," he said.
