China's Central Bank Seen Poised to Cut Prime Loan Rates

China’s central bank has pledged to arrange financial support to ensure local government debt problems are reduced.

The People’s Bank of China (PBOC) issued a statement on Sunday following a meeting on Friday with the top financial regulator, plus the securities regulator.

Senior financial policymakers are looking to reassure investors worried about the country’s increasingly shaky economic recovery, because of growing concerns that China’s property crisis is deepening and starting to spillover into its financial system.

China unexpectedly lowered several key interest rates earlier last week in a bid to shore up activity – and it is expected to cut its prime loan rates on Monday.

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Analysts have said that moves so far have been too little, too late, with much more forceful measures needed to stem the economy’s downward spiral.

Rescue package could involve debt swaps, extensions

Financial departments should coordinate support to resolve local debt risks, enrich tools to prevent and resolve debt risks, strengthen risk monitoring and firmly hold the line on avoiding systemic risk, the PBOC said.

China’s Politburo, a top decision-making body of the ruling Communist Party, in late July reiterated its focus on preventing local government debt risks and said it would carry out a basket of measures, but no plans have been announced yet.

There has been reports recently that China will offer local governments a combined 1 trillion yuan ($137 billion) in bond issuance quotas for refinancing.

Analysts believe that a coordinated rescue package would likely involve a combination of additional funding or refinancing channels, debt swaps and payment extensions, and possible debt restructurings.

PBOC urges major banks to increase lending

Debt-laden municipalities represent a major risk to China’s economy and financial stability, economists say, after years of over-investment in infrastructure, plummeting returns from land sales and soaring costs to contain Covid-19.

The finances of many local governments have deteriorated – and are said to total a whopping $13 trillion – partly because of deleveraging of massive debts in the once-mighty property sector, which has caused a growing number of developers to default on their debts.

But Fitch Ratings said earlier this month it expects the central government will try to avoid outright bailouts of more troubled municipalities, as that would undermine policymakers’ years-long effort to bring debt levels down to more manageable levels.

The Friday meeting, attended by PBOC Governor Pan Gongsheng, deputy director of the National Financial Regulatory Administration Xiao Yuanqi, vice chairman of the China Securities Regulatory Commission Li Chao and other officials from financial departments, also urged banks to step up lending.

“Financial support to the real economy must be strong enough” while major banks should increase lending, the statement said.

The PBOC also reiterated that it will optimise credit policies for the property sector, and strongly support small firms, technology innovation and the manufacturing sector.

But analysts note many consumers and companies are in no mood to boost spending or borrowing given the extremely uncertain economic climate. New bank lending fell to a 14-year low in July.