China’s central bank says local government debt risks are declining
From CNBC: 2024-08-16 00:27:05
China’s financial risks have decreased, including local government debt, according to People’s Bank of China Governor Pan Gongsheng. He stated that the central bank will collaborate with the Ministry of Finance to meet full-year growth targets and keep monetary policy supportive. Efforts to reduce high debt levels in the real estate sector have been prioritized.
Pan Gongsheng mentioned that local government financing vehicles (LGFVs) have seen a decline, with their debt levels decreasing and costs dropping significantly. LGFVs were established to support local infrastructure and other projects since local authorities couldn’t borrow directly. Despite improvements, LGFV debt remains a major issue with significant repayment needs.
Analysts from S&P Global Ratings noted that coordinated actions by local governments, financial institutions, and investors have helped alleviate some LGFV repayment concerns but that LGFV debt remains problematic. Over 1 trillion yuan ($140 billion) of LGFV bonds are due to mature soon, while the debt growth remains high. China’s slowing growth poses challenges for achieving growth targets.
The International Monetary Fund emphasized the need for supportive macroeconomic policies in China to mitigate debt risks. With nearly 4,000 small and medium-sized commercial and rural banks accounting for 25% of total banking assets, the IMF flagged them as potential weak links. Additionally, Pan Gongsheng mentioned a decrease in high-risk small and medium-sized banks and emphasized the importance of addressing real estate challenges.
He highlighted the record low mortgage down payment ratio of 15% and the low interest rates in China’s real estate sector. Authorities are assisting local governments in financing property acquisitions for affordable housing or rental units. Beijing has been working to shift China’s reliance from real estate to advanced tech and manufacturing sectors, away from property-driven growth.
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