"China’s Central Bank Reports Decrease in Financial Risks, Including Local Government Debt"

China’s financial risks have diminished, including those associated with local government debt, according to People’s Bank of China Governor Pan Gongsheng. In recent interviews with state media, Pan revealed that the central bank is committed to working with the Ministry of Finance to meet the country’s full-year economic growth targets and will maintain a supportive monetary policy.

Pan emphasized that the overall risk in China’s financial system has significantly decreased, with notable improvements in local government debt levels. He noted that the number of local government financing vehicles (LGFVs) has declined, and their debt burden has been significantly reduced. LGFVs, which emerged over the last two decades to fund infrastructure projects, previously faced high debt levels due to limited regulatory oversight and reliance on shadow banking.

Efforts by local governments, financial institutions, and investors over the past year have alleviated the repayment pressures on weaker LGFVs and improved market sentiment. However, S&P Global Ratings pointed out that LGFV debt remains a significant issue, with over 1 trillion yuan ($140 billion) in bonds maturing soon and ongoing debt growth in the high single digits.

China’s slowing economic growth, which was 5% in the first half of the year, raises concerns about meeting the full-year growth target of around 5% without further stimulus. The International Monetary Fund has recommended supporting domestic demand to mitigate debt risks, highlighting the vulnerability of small and medium-sized banks within China’s large banking system.

In real estate, Pan reported that the mortgage down payment ratio has reached a record low of 15%, with low interest rates also contributing to market stability. Central authorities are assisting local governments in acquiring properties to convert them into affordable housing or rental units, as China seeks to shift its economic focus from real estate to advanced technology and manufacturing.

Pan’s comments follow a week of volatility in the government bond market. On Thursday, the People’s Bank of China opted to delay the rollover of its medium-term lending facility, choosing instead to inject 577.7 billion yuan into the economy through a 7-day reverse repurchase agreement. The central bank is also scheduled to announce its monthly loan prime rate on Tuesday, having recently cut the 1-year and 5-year loan prime rates by 10 basis points each.