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

BEIJING — China’s financial risks have declined, including local government debt, People’s Bank of China Governor Pan Gongsheng said in an interview with state media published Thursday evening.

Pan also said the central bank would work with the Ministry of Finance to help China meet its full-year growth targets. He said monetary policy would remain supportive.

Beijing has increasingly prioritized addressing risks from high levels of debt in the real estate sector, which is closely tied to local government finances. International institutions have long called on China to reduce its soaring debt levels.

“The Chinese financial system as a whole is sound. The overall risk level has decreased significantly,” Pan said in an interview with state broadcaster CCTV, according to a Vscek translation of the transcript.

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

Local government financing vehicles have emerged in China over the past two decades to enable local authorities, which could not easily borrow directly, to finance infrastructure and other projects. LGFVs have primarily obtained financing from shadow banking.

The lack of regulatory oversight has often resulted in indiscriminate financing of infrastructure projects with limited financial returns. This has increased the debt burden on 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 weaker LGFVs and bolstered market sentiment,” analysts at S&P Global Ratings said in a July 25 report, a year after Beijing made a concerted effort to reduce LGFV risk.

However, the report said LGFV debt “remains a major problem.” The analysis found that more than 1 trillion yuan ($140 billion) of LGFV bonds are set to mature in the next two quarters, while debt growth remains in the high single digits.

Exacerbating the debt challenges is China’s slowing growth. The economy expanded 5% in the first half of the year, raising concerns among analysts that the country would not be able to meet its target of around 5% growth for the full year without more stimulus.

On August 2, during its periodic review of China’s financial situation, the International Monetary Fund said that macroeconomic policy should support domestic demand to mitigate debt risks.

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

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

In real estate, he noted that the mortgage down payment rate has hit a record low of 15 percent in China and interest rates are also low. Pan noted that central authorities are helping local governments with financing so they can acquire properties and turn them into affordable housing or rental units.

Real estate and related sectors once accounted for at least a quarter of China’s economy. But in recent years, Beijing has sought to shift the country away from relying on real estate for growth and toward high-tech and manufacturing.

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

On Thursday morning, the PBOC took the rare decision to delay a rollover of its medium-term credit facility in favor of a 577.7 billion yuan capital injection through another tool called the 7-day reverse repurchase agreement. Pan highlighted that 7-day tool in June when discussing the PBOC’s efforts to revamp its monetary policy framework.

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