Notes

Get yourself together. Local governments in China have built up huge debts over the past few years, and many of these governments are now having trouble paying for basic operations. Which is why, on November 8, the country’s central government announced it’d give the localities US$1.4 trillion in debt relief spread over the next five years. The funding, Beijing says, should allow them to keep making critical investments.

But investors are unimpressed. On the next trading day, stock prices fell on the Hong Kong exchange, China’s most important market. Meanwhile, shares and currencies across Southeast Asia are closely tied to the Chinese economy, and their values nearly all declined, too—even though the debt relief just enabled Chinese localities to give Chinese companies favorable deals on land purchases and tax breaks to increase production, which should theoretically boost the Chinese economy.

What’s happening here?

In September, Victor Shih looked at the problems behind China’s sluggish economy. Local-government debt, Shih says, is one of a few major structural issues—also including population decline and a housing-market crash. But these debts are now so high that Beijing would need a stimulus two to three times as high as the one announced this month to revive the economy. Yet they’re also so high that China can’t afford it.

—Michael Bluhm