China’s Financial Time Bomb: Will It Explode? Central Bank Answers

The Financial Situation in China: An Overview

The global markets are closely monitoring the financial and economic conditions in China.
While the United States has for now averted the imminent danger of a recession, the world’s second-largest economic power remains under the scrutiny of analysts and investors.

According to the latest news, there seems to be a sense of optimism surrounding China.
Governor of the People’s Bank of China, Pan Gongsheng, stated in an interview with state media that Chinese financial risks have decreased, including local government debt.

Beijing has been increasingly prioritizing addressing the threat posed by high levels of debt in the real estate sector, which is closely linked to local government finances.
International institutions have long urged China to reduce its growing debts as the instability of the Asian powerhouse jeopardizes the global financial system and the world economy, with commodity prices and trade levels heavily dependent on the dragon’s economic health.

The Real Financial Situation in China: What to Expect?

Governor Pan emphasized that the central bank will collaborate with the Ministry of Finance to help China achieve its growth targets for the entire year.
He assured that monetary policy will remain supportive.

“The Chinese financial system as a whole is solid.
The overall risk level has significantly decreased,” stated Pan in an interview aired by CCTV and according to CNBC’s translation.
He further added, “The number and debt levels of local government financing platforms are decreasing,” and the cost of their debt has “decreased significantly.”

However, the bomb could still explode.
Local government financing vehicles in China have emerged over the past two decades to allow local authorities, who couldn’t easily obtain direct loans, to fund infrastructure and other projects.
LGFVs have enabled financing mainly from the shadow banking system.

The lack of regulatory oversight has often led to indiscriminate funding of infrastructure projects with limited financial returns.
This has increased the debt burden on LGFVs, for which local governments are responsible.

Despite efforts to control the situation, S&P Global Ratings analysts still see LGFV debt as a “significant problem.” An analysis revealed that over 1 trillion yuan ($140 billion) of LGFV bonds are due to mature in the next two quarters.

Adding to the debt challenges is the slowing growth of China.
The economy grew by 5% in the first half of the year, raising concerns among analysts that the country may not be able to achieve its target of around 5% growth for the entire year without further stimulus.

During its periodic analysis of China’s financial situation on August 2, the International Monetary Fund stated that macroeconomic policy should support domestic demand to mitigate debt risks.

Governor Pan’s reassuring public comments come in the wake of a week of high volatility in the bond market.
On Thursday morning, the PBOC made the rare decision to delay rolling over its medium-term lending facility in favor of injecting 577.7 billion yuan through another instrument called a 7-day reverse repurchase agreement.

China still has many problems to solve, and global markets are watching and waiting with apprehension.