China’s ‘problematic’ local debt in the spotlight as it begins scaling back coronavirus stimulus
- With economic momentum stabilising in China, local government debt and corporate bond defaults are emerging as the prime financial risks
- But experts say Beijing faces a challenge in balancing debt reduction in cash-strapped regions while maintaining post-coronavirus growth
China’s continued strong recovery from the coronavirus pandemic in the first quarter is prompting Beijing to begin tackling financial vulnerabilities, including introducing tighter borrowing rules for debt-ridden provinces and curbing bank credit for the red-hot property sector.
Clearing debt together with helping businesses recover and prepare for international uncertainty are expected to be high on the agenda when China’s elite policymaking body, the 25-member Politburo, gathers for its upcoming meeting, analysts said at an economic conference in Beijing this week.
Such policy fine-tuning will be closely watched, as the world’s second largest economy has already started scaling back trillions of yuan worth of stimulus launched last year to fight the pandemic and its associated economic shock.
The local debt issues, which reflect the resource-funded growth model, are problematic
Wu Xiaoqiu, a professor of finance at Renmin University of China, warned local government debt and corporate bond defaults are the prime financial risks as China is now gearing down towards medium-speed growth.