China’s central bank says local government debt risks are declining

BEIJING – China’s financial risks have fallen, partly due to local government debt, People’s Bank of China Governor Pan Gongsheng said in interviews with state media published late Thursday.

Pan also said the central bank will work with the Ministry of Finance to enable China to achieve its full-year growth targets. That’s what he said monetary policy would remain supportive.

Beijing has increasingly prioritized tackling the risks posed by high debt levels in the real estate sector, which are closely tied to local government finances. International institutions have done so China has long called for cuts the rising debt burdens.

“China’s overall financial system is healthy. The overall risk level has dropped significantly,” Pan said in an interview with the Chinese government state broadcaster CCTV. This is evident from a CNBC translation of the transcript.

He noted that “the number and debt levels of local government financing platforms are decreasing” and that the cost of their debt servicing has “fallen significantly.”

In China, local government financing instruments emerged over the past twenty years to enable local governments, which could not easily borrow directly, to do so finance infrastructure and other projects. LGFVs mainly financing obtained of shadow banking.

The lack of regulatory oversight often meant indiscriminate financing of infrastructure projects with limited financial returns. That increased the debt burden for LGFVs, for which local governments are responsible.

Coordinated efforts over the past year by local governments, financial institutions and investors have “alleviated the most pressing repayment needs of the weakest LGFVs and boosted market sentiment,” S&P Global Ratings analysts said in a July 25 report, a year after Beijing issued a joint had made a decision. efforts to reduce LGFV risk.

However, the report states that LGFV debt “remains a major problem”. The analysis shows that more than 1 trillion yuan ($140 billion) of LGFV bonds will mature in the coming quarters, while debt growth remains high in the single digits.

The debt problem is further exacerbated by China’s slowing growth. The economy grew 5% in the first half of the year, prompting analysts to worry that the country could miss its full-year growth target of around 5% without additional stimulus.

The International Monetary Fund on August 2 said in its regular review of China’s financial situation that macroeconomic policies should support domestic demand to limit debt risk.

“Small and medium commercial and rural banks are the weak link in the large banking system,” the IMF report said, noting that China has nearly 4,000 such banks, accounting for 25% of the banking system’s total assets.

The number of high-risk small and medium-sized banks has fallen to half of what it was at its peak, Pan said via state media on Thursday, without sharing specific figures.

In real estate, he pointed out that mortgage down payments in China have reached a record low of 15%, and interest rates are also low. Pan noted that central authorities are helping local governments with financing so they can acquire properties and convert them into affordable housing or rental units.

Real estate and related sectors once accounted for at least a quarter of the Chinese economy. But in recent years, Beijing has tried to shift the country from a reliance on real estate for growth to advanced technology and manufacturing.

Pan’s public comments come after a week of increased volatility in the government bond market.

Earlier on Thursday, the PBOC made the rare decision to postpone the extension of its medium-term lending facility in favor of a Capital injection of 577.7 billion yuan through another instrument called the 7-day reverse repurchase agreement. Pan then highlighted that 7-day tool in June discussing the PBOC’s efforts to innovate its monetary policy structure.

The PBOC will release its monthly loan prime rate, another benchmark rate, on Tuesday morning. The central bank cut the 1-year and 5-year interest rates by 10 basis points each in July, after leaving the 1-year rate unchanged for 10 consecutive months and the 5-year rate unchanged for four months.