China’s central bank on hand to support debt-ridden local governments, governor Pan Gongsheng says

People’s Bank of China (PBOC) governor Pan Gongsheng says the debt level of the Chinese government is at the mid-to-lower level internationally
Pan also told the Financial Street Forum 2023 in Beijing small banks that are exposed to scores of bad loans account for ‘a very small proportion’ in the financial system

Banking & finance

Ji Siqiin Beijing

Published: 6:30pm, 8 Nov 2023

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China’s central bank would provide emergency liquidity support to debt-ridden local governments “when necessary”, governor Pan Gongsheng said on Wednesday, as Beijing ramps up efforts to address financial risks that may hamper an economic recovery.

Most of China’s local government debts, which are used for infrastructure investment and supported by physical assets, are concentrated in provinces with larger economies and faster growth that have the ability to resolve debts on their own, People’s Bank of China (PBOC) chief Pan said.

“Overall, the debt level of the Chinese government is at the mid-to-lower level internationally, and the central government’s debt burden is relatively light,” Pan said at the opening ceremony of the annual conference of the Financial Street Forum in Beijing.

Financial authorities and institutions have taken a slew of measures, including promoting debt rollovers and restricting new investment projects, to actively help local governments resolve their debt risks since early this year, Pan said.

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China’s financial system has been in a precarious position over the past year amid a sputtering post-pandemic recovery, a local-level debt crisis and an ailing property sector, which continue to erode investor confidence.

Last month, Beijing approved the issuance of 1 trillion yuan (US$137 billion) of sovereign bonds, with the funds to be transferred to local governments to support reconstruction and improve disaster prevention and relief capabilities.

The move was seen as reflecting Beijing’s efforts to do more to ease the growing debt pressure facing many local governments.

Pan also said on Wednesday that “the spillover effects of market adjustments within the real estate sector on the financial system are generally controllable”.

After more than 20 years of prosperity, China’s real estate market is undergoing a major transformation and looking for a new equilibrium

Pan Gongsheng

Banks in China – especially smaller ones – have been widely exposed to the ongoing property crisis, marked by the fall of Evergrande Group and the debt fallout at Country Garden, as the sector was the biggest economic engine for decades.

China has been long implementing a prudent personal housing loan policy, Pan said, adding that property-related lending accounts for 23 per cent of bank loan balances, of which about 80 per cent are personal housing loans.

“After more than 20 years of prosperity, China’s real estate market is undergoing a major transformation and looking for a new equilibrium,” Pan said.

The transformation has brought certain challenges, as well as new opportunities, as China’s urbanisation process is still under way, which provides the long-term stable development of the real estate sector with a solid foundation, he added.

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The PBOC will look to provide financial support for the stable and healthy development of the real estate market, lower risk levels, prevent risk spillovers and meet reasonable fundraising demands by private and state-owned developers, Pan said.

The bank will also provide medium-to-long-term low-cost financial support for the construction of three major housing-related public projects, including affordable housing, Pan added.

The three-day Financial Street Forum was held a week after the central financial work conference, the twice-a-decade highest level meeting of China’s financial sector, where President Xi Jinping said preventing and resolving financial risks must be an “eternal theme” for the Chinese government.

Pan said stressed small banks that are exposed to scores of bad loans account for “a very small proportion” in the overall financial system, both in terms of number and assets.

We will steadily advance the internationalisation of the yuan, deepen reform and opening up in the foreign exchange field

Pan Gongsheng

“After reforms and de-risking actions in recent years, the number of high-risk small and medium-sized banks has dropped by half from its peak,” Pan added.

And although the yuan has tumbled to a 16-year low against the US dollar in the past months, Pan said that China has the confidence, ability and conditions to maintain the basic stability of the exchange rate at a reasonable and balanced level, while insisting that the market plays a decisive role.

“We will steadily advance the internationalisation of the yuan, deepen reform and opening up in the foreign exchange field,” Pan said.

“We will do a good job in the work of the China-US and China-EU financial working groups, pragmatically promote international financial cooperation, and actively participate in international economic and financial governance.”