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

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

Pan also said the central bank will work with the Ministry of Finance to help China meet its full-year growth target. Monetary policy will remain supportive.

Beijing increasingly prioritizes risk management from high debt levels in the real estate sector, which is closely linked to local government finances. International organizations have has long called on China to reduce debt levels are skyrocketing.

“China’s overall financial system remains stable. The overall risk level has decreased significantly,” Pan said in an interview published by state television CCTV. According to CNBC’s translation of the news.

He noted that “the number and level of debt of local government financial platforms are decreasing” and the cost of their debt burden has “reduced significantly”.

Local government financing vehicles emerge in China over the past two decades to allow local governments, which cannot easily borrow directly, infrastructure fund and other projects. LGFV mainly has been financed from underground banking.

The lack of regulatory oversight often means indiscriminate funding of infrastructure projects with limited financial returns. That increases the debt burden on LGFVs, for which local governments are responsible.

S&P Global Ratings analysts said in a July 25 report — a year since Beijing launched a concerted effort to reduce LGFV risks — that coordinated efforts over the past year by local governments, financial institutions and investors have “reduced the most pressing debt repayment needs of the weakest LGFVs and boosted market sentiment.”

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 due to mature in the next few quarters, while debt growth remains in the high single digits.

Compounding the debt challenge is China’s slowing growth. The economy grew 5% in the first half of the year, raising concerns among analysts that the country will miss its full-year growth target of around 5% without more stimulus.

International Monetary Fund on August 2 said in its regular review of China’s financial situation that macroeconomic policy should support domestic demand to mitigate debt risks.

“Small and medium-sized commercial banks 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 total banking system assets.

In the real estate sector, he pointed out that mortgage repayment rates have hit a record low of 15% in China and interest rates are also low. Pan noted that central authorities help local government financially so they can buy properties and turn them into affordable housing or rental properties.

Real estate and related sectors once accounted for at least a quarter of China’s economy. But in recent years, Beijing has sought to move the country away from its reliance on real estate for growth, towards advanced technology and manufacturing.

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

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

The PBOC is scheduled to announce its monthly loan prime rate, another benchmark, on Tuesday morning. The central bank cut the one-year and five-year loan prime rates by 10 basis points each in July, after keeping the one-year rate unchanged for 10 consecutive months and the five-year rate unchanged for four months.