In a recent speech at the Lujiazui Forum in Shanghai, Pan Gongsheng, governor of the People’s Bank of China (PBOC), told state media that financial vulnerabilities, especially those associated with local government debt, are declining. The discussion was part of a broader dialogue on China’s economic health, aired in a broadcast Thursday night.
In his strategic outline, Governor Pan highlighted the cooperation between the PBOC and the Ministry of Finance to achieve the nation’s economic growth targets for the year. He reassured that monetary policies will continue to be conducive to this goal.
In recent times, the Chinese government has focused on mitigating financial risks from the significant debt levels in the real estate sector, which are closely linked to the fiscal health of local governments. This concern has been echoed by several global financial bodies that have called for moderation in China’s growing debt figures.
In a television interview with CCTV, Pan elaborated, “Our financial system is fundamentally sound, with a notable reduction in overall risk levels.” He highlighted a significant reduction in both the number and cost of debt held by local government financing vehicles (LGFVs).
LGFVs have been instrumental in the past two decades, helping local governments finance various projects through means other than direct lending, mostly through shadow banking channels. This method, however, lacked rigorous regulatory oversight and often led to financially unsustainable projects that increased the debt burden for which local governments were responsible.
Analysts at S&P Global Ratings, in a report dated July 25, acknowledged that concerted actions by local authorities, financial institutions and investors over the past year have substantially eased immediate repayment pressures on financially weaker LGFVs, thereby improving market sentiment. Despite these efforts, the report warned that LGFV debt still poses a significant challenge, with more than 1 trillion yuan ($140 billion) in bonds maturing within the next six months and debt growth persisting at elevated levels.
The slowdown in China’s economic expansion, which had been 5% for the first half of the year, has raised concerns about meeting its annual growth target of around 5% without additional economic stimulus. On August 2, the International Monetary Fund recommended that China’s macroeconomic policies should strengthen domestic demand to mitigate these debt concerns.
Addressing vulnerabilities within the banking sector, particularly among smaller commercial and rural banks, Pan noted a reduction in the number of high-risk banks to half their peak. He also touched on the real estate sector, where he cited historic lows in mortgage down payment rates and interest rates, helping local governments turn properties into affordable or rental housing.
As Beijing continues to pivot from real estate-led growth to a more diversified economy that emphasizes high-tech and manufacturing, these financial adjustments are critical. Pan’s comments come amid a tumultuous period in the government bond market, highlighted by the PBOC’s recent strategic monetary interventions.
The PBOC is scheduled to announce adjustments to its key lending rates next Tuesday, following a recent rate cut aimed at boosting economic activity. This follows a period of stability in rates, underscoring the central bank’s responsive adjustments to evolving economic indicators.
