China is increasing its financial aid for regional banks as it faces multiple economic challenges, such as a slowing growth, a property slump, a debt crisis, and a global pandemic. The central bank and the government are taking various measures to ensure the stability and liquidity of the banking sector, especially for small and medium-sized banks that serve the local economy.
The People’s Bank of China (PBOC) has indicated a possible shift in its monetary policy stance towards more supportive measures, according to its latest quarterly report published last Friday. The report dropped previous phrases to “control the valve on money supply” and vowing not to “flood the economy with stimulus”, signalling more credit support in coming months.
The PBOC also removed from its policy outlook a few key phrases cited in previous reports, such as sticking with “normal monetary policy”. That suggests a change in attitude towards more easing steps, several major banks like Citigroup, Nomura and Goldman Sachs said.
The PBOC’s more dovish outlook follows growing concerns about the economy’s outlook flagged by several officials recently. Premier Li Keqiang told a seminar on Friday that China still faces “many challenges” in keeping the economy stable, although this year’s goals will likely be achieved. Liu Shijin, who sits on the central bank’s monetary policy committee, said in an online forum on Sunday that the economy could enter a period of “quasi-stagflation”, which needs close attention if it happens.
The PBOC said the economic recovery faces restrictions from “temporary, structural and cyclical factors” and it has become more difficult to maintain a stable economy. Growth could weaken to below 5 per cent next year, according to some forecasts, testing authorities’ resolve to cut the economy’s reliance on the highly leveraged property sector.
Government tells banks to roll over local debt
China has told state-owned banks to roll over existing local government debt with longer-term loans at lower interest rates, two sources with knowledge of the matter said, as part of Beijing’s efforts to reduce debt risks in a faltering economy.
Debt-laden municipalities represent a major risk to the world’s second-largest economy and its financial stability, economists say, amid a deepening property crisis, years of over-investment in infrastructure and huge bills to contain the COVID-19 pandemic.
Local government debt reached 92 trillion yuan ($12.58 trillion), or 76% of the country’s economic output in 2022, up from 62.2% in 2019. Part of that is debt issued by local government financing vehicles (LGFVs), which cities use to raise money for infrastructure projects, often at the urging of the central government when it needs to boost economic growth.
Empty coffers could make it harder for Beijing to kickstart a sputtering economic recovery. The PBOC issued orders last week to major state lenders to extend terms, adjust repayment plans, and reduce interest rates on outstanding loans to LGFVs, according to the sources.
Loans that were due in 2024 or before will be categorized as “normal” instead of non-performing if they overdue, and that won’t affect banks’ performance evaluations, one of the sources said.
To ensure banks do not incur heavy losses from the debt restructuring, interest rates on rolled over loans should not be below China’s Treasury bond rates, said one source, adding that loan terms should not exceed 10 years. China’s benchmark 10-year government bond is now yielding around 2.7%, while the benchmark one-year loan prime rate is 3.45%.
Central bank supports property industry and green finance
With regard to the property industry, an underpinning of China’s real economy, the PBOC said that it has made multi-pronged efforts to bolster its development, and it encourages local governments’ region-specific policies, such as lowering mortgage rates and advance payments for homebuyers.
The PBOC also said it will step up efforts to consolidate an economic recovery, citing a slew of risks to the global economy while pledging to implement prudent monetary policy and keep liquidity reasonably ample.
The central bank said it will support the development of green finance and carbon neutrality, and promote the internationalization of the yuan in an orderly manner.
The PBOC also said it will strengthen the supervision and regulation of financial technology, and crack down on illegal activities such as money laundering, terrorism financing and tax evasion.
The PBOC’s report came after China’s top leaders met last week to discuss the economic situation and set the tone for next year’s policy agenda. The meeting stressed the need to maintain stability while pursuing reform and opening up, and to balance the relationship between development and security.
The meeting also called for efforts to prevent and defuse major risks, especially in the financial sector, and to ensure the smooth operation of the market and the social order.
