China Commits to Unified Support in Addressing Local Government Debt Risks, Reports Reuters

BEIJING (Reuters) – The People’s Bank of China (PBOC) announced on Sunday a coordinated effort to provide financial support aimed at resolving local government debt issues. This decision comes as policymakers strive to bolster an increasingly fragile economic recovery and address investor concerns.

The statement follows a recent joint meeting involving the PBOC, the national financial regulator, and the securities authority. It reflects rising fears that the ongoing property crisis in China is beginning to affect the financial system.

Last week, China unexpectedly reduced several key interest rates to stimulate economic activity and is anticipated to lower prime loan rates on Monday. However, analysts argue that these actions may be insufficient and that more aggressive measures are necessary to reverse the economic downturn.

According to the PBOC, financial departments should work together to mitigate local debt risks, enhance tools for managing and resolving these risks, strengthen monitoring efforts, and maintain a focus on preventing systemic financial problems.

In late July, the Politburo, which is the top decision-making body of the Communist Party, reaffirmed its commitment to managing local government debt risks and indicated a range of measures would be implemented, although specific plans have not yet been revealed.

Reports indicate that China is set to provide local governments with a total of 1 trillion yuan (approximately $137 billion) in bond issuance quotas for refinancing.

Experts believe that a comprehensive rescue package may involve a mix of additional funding sources, refinancing options, debt swaps, payment extensions, and potentially debt restructuring.

Economists warn that heavily indebted municipalities pose significant risks to both China’s economy and its financial stability, following years of excessive infrastructure investment, decreased land sale revenues, and increased costs associated with pandemic management.

The financial situations of many local governments have worsened amidst a significant downturn in the once-thriving property sector, leading to an increasing number of defaults among developers.

However, Fitch Ratings noted earlier this month that the central government is likely to avoid outright bailouts of troubled municipalities, as this could undermine ongoing efforts to bring debt levels down to more sustainable levels.

The recent meeting, which included PBOC Governor Pan Gongsheng and other key financial officials, emphasized the need for banks to enhance lending practices. The statement highlighted that "Financial support to the real economy must be strong enough," and stressed that major banks should increase their lending activities.

The PBOC also reiterated its commitment to optimizing credit policies within the property sector and extending strong support to small enterprises, technological innovation, and the manufacturing industry.

Despite these measures, analysts point out that many consumers and businesses remain reluctant to increase spending or borrowing amid the uncertain economic landscape, as evidenced by new bank lending dropping to a 14-year low in July.