CHINA: China’s central bank announced on Sunday that it will collaborate on providing financial assistance to address issues related to local government debt as policymakers aim to bolster the uncertain economic rebound and alleviate concerns among investors.
The statement, which follows a collective meeting on Friday involving the People’s Bank of China, the primary financial regulatory body, and the securities regulator, comes amid escalating worries that China’s ongoing property challenges are beginning to impact its financial sector.
China surprisingly reduced many significant interest rates earlier this week in an effort to boost activity, and it is anticipated to slash the rates on prime loans on Monday. However, economists say these actions have been too little, too late, and that far more drastic steps are required to stop the economy’s downward spiral.
As per the PBOC statement, financial departments should work together to coordinate support for resolving local debt risks, enhance tools for preventing and resolving debt risks, boost risk monitoring, and strictly adhere to avoiding systemic risk.
In late July, China’s Politburo, a key decision-making entity within the Communist Party, reiterated its commitment to mitigating risks associated with local government debt.
While specific plans have not been disclosed, a report on August 11 indicated that China intends to provide local governments with a total of 1 trillion yuan ($137 billion) in bond issuance quotas to support refinancing efforts.
Analysts speculate that a comprehensive rescue strategy could encompass various measures, including increased funding, refinancing options, debt swaps, extended payment timelines, and even potential debt restructuring.
Economists warn that China’s economy and financial stability face significant threats from municipalities burdened with debt. This risk has emerged due to years of excessive investment in infrastructure, declining profits from land sales, and rising expenses related to managing COVID-19.
The finances of numerous local governments have worsened amid a sharp downturn in the previously robust property market, leading to an increasing number of debt defaults among developers.
The central government is likely to avoid direct bailouts of struggling municipalities to prevent undermining their ongoing endeavour to reduce debt levels.
During the Friday gathering, attended by officials including PBOC Governor Pan Gongsheng and vice chairman of the China Securities Regulatory Commission Li Chao, there was a call to increase lending by banks, as well as the presence of deputy director of the National Financial Regulatory Administration Xiao Yuanqi. “Financial support for the real economy must be strong enough,” while significant banks should enhance lending, reads the statement.
The PBOC also restated its intention to improve credit strategies for the real estate industry and provide substantial backing for small businesses, technological advancement, and manufacturing.
Nevertheless, analysts observe that, due to the highly unpredictable economic environment, numerous consumers and companies are hesitant to increase their spending or borrowing. Notably, new bank lending experienced a notable decline in July, reaching its lowest point in 14 years.
Also Read: Downward Pressure on European Stocks as China-Exposed Miners Impact Opening
