China vows enduring local debt cleanup at key policy meeting
CHINA vowed to set up a long-term mechanism to resolve debt risks tied to local authorities and signalled willingness to expand central government borrowing as it concluded a twice-a-decade policy meeting.
The two-day Central Financial Work Conference, attended by President Xi Jinping, also stressed the need to consolidate Communist Party control over the financial system and provide more funds for innovation, hi-tech manufacturing, green technology and small-to-medium sized companies.
A summary of the conference, published by the state-run Xinhua News Agency, also contained a pledge to “optimise the debt structure of central and local governments”. Economists have long argued China’s government debt is too concentrated at the local level.
“This phrase suggests the central government may take up more funding responsibilities and leverage up further while local governments de-leverage and de-risk by resolving implicit debt problems,” Goldman Sachs economists led by Maggie Wei wrote in a note.
The closely watched gathering to set broad priorities for the US$61 trillion financial sector comes against the backdrop of a lengthy real estate slump. Large state-owned banks have been hit by exposure to failing property developers and troubled local governments, while Wall Street firms such as Goldman Sachs Group have scaled back ambitious expansion plans.
The meeting, which ended on Tuesday (Oct 31), signalled Beijing is considering further measures to resolve several sources of financial risk – including local government debt, real estate developers and stresses at smaller banks, without giving specifics.
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The CSI 300 Index fell 0.1 per cent after paring early gains of as much as 1 per cent while the Hang Seng China Enterprises Index in Hong Kong fell as much as 0.9 per cent. Foreign funds sold Chinese stocks on a net basis for the third consecutive month in October, as sentiment remains weak over the country’s economic recovery outlook.
Reaction in the local currency market was muted with the onshore yuan and government bond yields traded flat at the open.
Beijing has over the past year asked the nation’s largest banks to shoulder some of the responsibility by providing support to troubled developers as well as local government financing vehicles, which sit on a US$9 trillion pile of debt. Fulfilling those duties is likely to hurt their profit-margins.
The government kicked off a debt swap programme worth more than one trillion yuan (S$189 billion) in late September, allowing local governments to replace their so-called hidden debt for bonds carrying lower interest rates. Over 20 regions including Inner Mongolia and Tianjin have released their special “refinancing” bond issuance plans since then, with some selling debt last month, Bloomberg calculated using public reports.
Last week, Beijing also announced an unusual one trillion yuan central government bond issuance to support local spending, with banks expected to be the primary buyers of the special bond sales. Financial regulators even asked its policy banks and biggest lenders to issue new loans to cover offshore debt issued by local governments maturing this year and in 2024, Bloomberg reported in October.
Some of China’s biggest banks have been offering local government financing vehicles loans with ultra-long maturities and temporary interest relief to prevent a credit crunch since the second quarter.
The conference readout called for a “timely” handling of risks at small and medium sized financial institutions, a term that includes local banks, which often have weaker balance sheets. Large state-owned financial institutions will be supported to get “better and stronger”, it added.
“Large state-owned financial institutions will likely acquire more market share in the financial sector,” said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management.
Party control
The conference, which was delayed by a year due to China’s strict Covid-zero approach, was first held in 1997 in the wake of the Asian financial crisis. Its importance has grown in recent years, with the previous meeting in 2017 attended by Xi, while the preceding ones were overseen by China’s premiers.
The meeting highlighted the Communist Party’s “centralised and unified” leadership over the sector, which is the “fundamental guarantee” to all financial work. It will also resolutely crack down on corruption, the statement said.
The Communist Party has asserted its control over the sector with a sweeping anti-corruption campaign and ideology push. Earlier this year, a new, enlarged national regulator was formed as some responsibilities were shifted from the central bank and government to a party-controlled body called the Central Financial Commission.
Hong Kong, Shanghai
Vice-premier He Lifeng made the concluding speech at the meeting, cementing his status as the country’s top financial official. State media this week described He as office director of the Communist Party’s Central Financial and Economic Affairs Commission, a powerful party economic body.
The meeting said China will continue to open up its financial sector with the aim of attracting more foreign financial institutions and long-term funds. Both Shanghai and Hong Kong will be promoted as international financial centres, it added. Financial opening needs to be “balanced” with security, it said.
On real estate, the language was in line with previous official statements, with a vow to meet the “reasonable” financing needs of real estate companies and a call for all developers, regardless of ownership, to be treated equally when it comes to financing.
“The text doesn’t provide an obvious signal that policymakers are about to shift their fundamental approach, such as by taking a more forceful stance to resolve developer debt issues,” said Duncan Wrigley, chief China economist at Pantheon Macroeconomics. BLOOMBERG
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