China debt: Beijing warned opportunity costs are rising as it seeks comprehensive solution to local government crisis
- Beijing has recognised the urgency of its local-government debt crisis, saying last month that it was necessary to resolve it with ‘a comprehensive solution’
- International Monetary Fund said that China’s total local-government financial vehicle (LGFV) debt has swollen to a record 66 trillion yuan (US$9 trillion) this year
China is considering stronger measures to address risks from its local-government debt crisis, but opportunity costs are rising when it comes to curbing systemic risks in the state-dominated financial system, according to analysts.
The financial system has already been put under pressure from property woes over the past few years, and analysts have warned that the costs could be huge if Beijing does not move fast enough to resolve the real estate market crisis, which has ramifications for local governments.
“All in all, while the structural consequences of a disinflating real estate bubble cannot be avoided, Chinese policymakers should focus on limiting potential spillovers into the financial sector and thereby systemic risk,” Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis, said this week.
“The longer they wait to do so, the bigger the cost will be.”
The internal deliberation may take time and result in delays in delivering effective policy responses