In recent interviews with state media, Pan Gongsheng, Governor of the People’s Bank of China (PBOC), emphasized a marked decrease in China’s financial risks, including those associated with local government debt.
His comments, released late Thursday, outline the central bank’s commitment to supportive monetary policy as the nation aims to achieve its annual growth targets.
Significant reduction in financial risks
Pan noted that China’s financial system is now “sound” and that the risk level has notably declined. According to Pan, the number of local government financing vehicles (LGFVs) and their associated debt levels have decreased.
The cost burden of this debt has also dropped considerably.
LGFVs were created to help local authorities secure funding for infrastructure projects, but these entities often relied on shadow banking and faced high levels of debt due to insufficient regulatory oversight.
Debt relief efforts yielding positive results
The international financial community has long urged China to address its escalating debt levels, particularly those linked to real estate.
Pan’s statements follow a year of concentrated efforts by local governments and financial institutions to manage LGFV risks. A recent report from S&P Global Ratings indicates that while the repayment needs of weaker LGFVs have been alleviated and market sentiment has improved, LGFV debt remains a significant issue.
Over 1 trillion yuan (approximately $140 billion) in LGFV bonds are set to mature in the coming quarters, with debt growth continuing in the high single digits.
China’s growth challenges amid debt efforts
China’s economy grew by 5% in the first half of the year, prompting concerns about meeting the full-year growth target of around 5% without further stimulus.
The International Monetary Fund (IMF) has recommended that macroeconomic policies support domestic demand to manage debt risks.
In its latest review, the IMF highlighted vulnerabilities within China’s banking sector, noting that small and medium-sized banks, which constitute a significant portion of the banking system’s assets, remain a weak link.
Real estate adjustments and PBOC policy shift
Addressing the real estate sector, Pan highlighted that the mortgage down payment ratio in China has reached a record low of 15%, and interest rates are also reduced.
The central government is assisting local authorities in acquiring and repurposing properties into affordable housing and rental units, shifting focus from real estate-driven growth to advanced technology and manufacturing sectors.
The PBOC has recently taken steps to adjust its monetary policy amid increased volatility in the government bond market.
On Thursday, the central bank opted to delay a rollover of its medium-term lending facility and instead implemented a 577.7 billion yuan capital injection through a 7-day reverse repurchase agreement.
This adjustment reflects ongoing efforts to enhance the monetary policy framework.
Next Tuesday, the PBOC will announce its monthly loan prime rate. In July, the central bank had cut the 1-year and 5-year loan prime rates by 10 basis points each, following a prolonged period of stability.
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