China’s Central Bank Aims to Tackle Local Debt Woes Amid Property Crisis

In an unexpected move last week, China reduced several key interest rates in an attempt to boost economic activity.

China’s central bank has announced plans to coordinate financial assistance aimed at resolving local government debt issues, according to a recent statement.

As the country seeks to stabilize its increasingly fragile economic recovery and soothe concerned investors, the People’s Bank of China (PBOC) has teamed up with top financial and securities regulators to address the escalating concerns stemming from China’s deepening property crisis.

In a joint meeting involving the PBOC, China’s premier financial regulator, and the securities regulatory authority, the statement acknowledges mounting worries that the property market turmoil is spilling over into the broader financial system.

In an unexpected move last week, China reduced several key interest rates in an attempt to boost economic activity.

More action is anticipated, including a potential cut in prime loan rates on the horizon.

Nonetheless, analysts argue that these steps are insufficient, asserting that more robust measures are necessary to reverse the economy’s downward trajectory.

The PBOC’s statement emphasizes the need for financial departments to collaborate on resolving local debt risks.

The approach involves enhancing tools to prevent and address these risks, intensifying risk surveillance, and firmly managing systemic risk.

The statement aligns with the Politburo’s focus on mitigating local government debt risks, yet concrete strategies are yet to be disclosed.

Bloomberg reported a plan to provide local governments with a total of 1 trillion yuan ($137 billion) in bond issuance quotas for refinancing.

Experts speculate that a comprehensive rescue package could involve diverse components, such as additional funding, refinancing avenues, debt swaps, payment extensions, and potential debt restructurings.

With numerous debt-ridden municipalities posing a substantial threat to China’s economic stability, the challenges stem from years of over-investment in infrastructure, diminished land sales proceeds, and rising expenses related to the COVID-19 containment efforts.

The financial state of many local governments has deteriorated concurrently with a significant downturn in the previously robust property sector, leading to a rise in developer defaults.

While Fitch Ratings anticipates the central government’s hesitance to directly bail out struggling municipalities, policymakers aim to strike a balance between intervention and maintaining manageable debt levels.

The joint meeting also emphasized the need for increased lending by banks.

The statement underscored the necessity of robust financial support to the real economy and urged major banks to enhance lending activities.

Furthermore, the PBOC intends to refine credit policies for the property sector, strongly endorsing small businesses, technological innovation, and manufacturing.

However, given the prevailing economic uncertainty, both consumers and companies remain cautious about increasing spending or borrowing. Reflecting this sentiment, new bank lending saw a 14-year low in July.

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