BEIJING — China’s financial risks have fallen, including local government debt, People’s Bank of China Governor Pan Gongsheng said in interviews with state media published Thursday night.
Pan also said the central bank will work with the Ministry of Finance to enable China to achieve its full-year growth targets. He said monetary policy would remain accommodative.
Beijing has increasingly prioritized addressing risks from high debt levels in the real estate sector, which is closely linked to local government finances. International institutions have long called on China to reduce its rising debt levels.
“China’s overall financial system is sound. The overall risk level has decreased significantly,” Pan said in an interview carried by state broadcaster CCTV. That’s according to a translation of the transcript by CNBC.
He noted that “the number and debt levels of local government financing platforms are decreasing” and that the cost of their debt “has fallen 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 obtained financing primarily from shadow banking.
The lack of regulatory oversight often meant indiscriminate financing of infrastructure projects with limited financial returns. This increased the debt burden on LGFVs, for which local governments are responsible.
Coordinated efforts last year by local governments, financial institutions and investors “alleviated the most pressing payment needs of weaker LGFVs and boosted market sentiment,” analysts at S&P Global Ratings said in a July 25 report, a year since 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) in LGFV bonds are set to mature in the coming quarters, while that debt growth remains in the high single digits.
Compounding the debt challenges is China’s sluggish growth. The economy grew 5% in the first half of the year, raising concerns among analysts that the country would not be able to meet its full-year growth target of around 5% without additional stimulus.
The International Monetary Fund said on Aug. 2 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 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, which account for 25 percent of the banking system’s total assets.
Approaching the real estate market
The number of high-risk small and medium-sized banks has fallen to half of what it was at the peak, Pan told state media on Thursday, without sharing specific figures.
On the property market, he noted that the mortgage down payment rate has hit a record low of 15 percent in China, and that 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 from reliance on real estate for growth to advanced technology and manufacturing.
Pan’s public comments come after a week of high volatility in the government bond market.
Earlier on Thursday, the PBOC took the rare decision to postpone a rollover of its medium-term lending facility in favor of a 577.7 billion yuan capital injection through another tool called a 7-day reverse repurchase agreement. Pan highlighted this 7-day tool in June when discussing the PBOC’s efforts to overhaul its monetary policy framework.
The PBOC is scheduled to release its monthly key lending rate, another benchmark rate, on Tuesday morning. The central bank cut the 1-year and 5-year benchmark lending rates by 10 basis points each in July, after keeping the 1-year rate unchanged for 10 straight months and the 5-year rate unchanged for four months.
