Chinese authorities finally announced on Friday afternoon the long-awaited new stimulus measures approved by the Standing Committee of the National People's Congress, with finance minister Lan Foan giving an analysis. However, markets responded to the news negatively.

A CNY 10 trillion ($1.4 trillion) debt package was approved to allow local governments to refinance their debt, the so-called “hidden local government debt substitution”, Kallanish notes.

The essence of this move is to allow local governments to repay old high-interest bonds with new bonds at lower interest rates. This includes a CNY 6 trillion bond quota obtained by directly raising the debt limit of local governments, which is expected to be issued within three years. This is in line with market expectations.

In addition, the government will arrange CNY 500 billion from the issuance of local government special bonds for this purpose every year for five consecutive years, for a total of CNY 4 trillion. This arrangement for debt substitution in fact exceeded market expectations.

With the help of these new bonds, China's local governments are expected to save a total of CNY 600 billion in interest payments over the next five years.

However, the market's previous expectations of CNY 4 trillion to support the recovery of real estate fell through, and no stimulus was announced for consumption.

The market's immediate reaction to the news was negative. By 11pm local time on Friday, the main contract of FTSE China A50 Index Futures traded on SGX, the world's only offshore futures that tracks China's A-share market, dropped over 2% versus 4pm.

The trading price of the most-traded iron ore contract immediately slumped from $104.05/tonne to $101.1/t, within ten minutes of the press conference, before rebounding somewhat to around $102/t.

Chinese steel and related futures also trended lower after Friday night trading. The declines compared to Friday’s daytime average trading price were 1.5% for coking coal, 2.1% for coke, 2% for iron ore, 1.4% for rebar and 1.3% for HRC.

There are differences in market sentiment, with bulls excited about the CNY 10 trillion debt package sum.

"The reduction of local government debt pressure will undoubtedly have a positive effect on the payment of existing infrastructure projects and the promotion of subsequent ones,” a source told Kallanish on Friday.

Other market observers expressed disappointment. Debt substitution does not directly help economic growth and there are no new bonds to support property or resident consumption.

The additional share taken from the expected issuance of local government special bonds each year is also detrimental to the infrastructure that is supposed to be supported. According to the usual 70% ratio, CNY 500 billion of local government special bonds used for debt substitution means there is CNY 350 billion less in infrastructure funds annually.

The government is very clear about the areas that have not met market expectations but has also released a positive message to prevent the market from falling too much.

Lan said that measures for other industries are under review or being accelerated. This includes tax policies to support real estate markets, special government bonds to support the first-tier capital of the six major state-owned banks, and local government special bonds to support the purchase of land and commercial housing. But the outcome of these remains to be seen.

The next government meeting that may announce major measures is the Central Economic Work Conference in late December. The meeting will determine the overall tone of China's economic development in 2025.