China will coordinate financial support to resolve local government debt problems, the central bank said in a statement on Sunday, as policymakers look to shore up an increasingly shaky economic recovery and reassure worried investors.
The statement, following a joint meeting on Friday by the People’s Bank of China (PBOC), the country’s top financial regulator and the securities regulator, comes amid growing concerns that China’s deepening property crisis is starting to spillover into its financial system.
China unexpectedly lowered several key interest rates earlier last week in a bid to shore up activity and it is expected to cut its prime loan rates on Monday, but analysts say moves so far have been too little, too late, with much more forceful measures needed to stem the economy’s downward spiral.
Financial departments should coordinate support to resolve local debt risks, enrich tools to prevent and resolve debt risks, strengthen risk monitoring and firmly hold the line on avoiding systemic risk, according to the PBOC statement.
China’s Politburo, a top decision-making body of the ruling Communist Party, in late July reiterated its focus on preventing local government debt risks and said it would carry out a basket of measures, but no plans have been announced yet.
Bloomberg reported on Aug. 11 that China will offer local governments a combined 1 trillion yuan ($137 billion) in bond issuance quotas for refinancing.
Analysts believe that a coordinated rescue package would likely involve a combination of additional funding or refinancing channels, debt swaps and payment extensions, and possible debt restructurings.
Debt-laden municipalities represent a major risk to China’s economy and financial stability, economists say, after years of over-investment in infrastructure, plummeting returns from land sales and soaring costs to contain COVID-19.
The finances of many local governments have deteriorated alongside a severe slump in the once-mighty property sector, which has caused a growing number of developers to default on their debts.
But Fitch Ratings said earlier this month it expects the central government will try to avoid outright bailouts of more troubled municipalities, as that would undermine policymakers’ years-long effort to bring debt levels down to more manageable levels.
The Friday meeting, attended by PBOC Governor Pan Gongsheng, deputy director of the National Financial Regulatory Administration Xiao Yuanqi, vice chairman of the China Securities Regulatory Commission Li Chao and other officials from financial departments, also urged banks to step up lending.
“Financial support to the real economy must be strong enough” while major banks should increase lending, the statement said.
The PBOC also reiterated that it will optimise credit policies for the property sector, and strongly support small firms, technology innovation and the manufacturing sector.
But analysts note many consumers and companies are in no mood to boost spending or borrowing given the extremely uncertain economic climate. New bank lending fell to a 14-year low in July.