(Significantly less) risky business

Central bank (PBoC) governor Pan Gongsheng thinks China’s financial sector risk is declining.

In an interview with state media on Saturday, Pan said:

• “China’s financial system is generally sound and financial risks in key areas are being resolved in an orderly manner”

Pan was upbeat on efforts to deal with local government debt. He said:

• The number of local government financing vehicles (LGFVs) has dropped
• LGFV debt has declined
• Maturing LGFV debt has mostly been extended, restructured, or replaced
• LGFV financing costs have fallen

On the banking system, Pan said the number of high-risk small and medium-sized banks has fallen by almost half from its peak.

Get smart: Efforts launched in H2 2023 to reduce local governments’ debt servicing costs have been hugely successful.

• Spreads on LGFV bonds have narrowed significantly.
• Banks have refinanced high-interest shadow banking loans at much lower rates.
• Local governments have shifted loans that LGFVs were unable to service onto their own balance sheets.

Get smarter: Pan didn’t mention that local government revenue – from both land sales and taxes – has dropped significantly. This means that despite lower interest payments, local authorities still don’t have the resources to service debt obligations.

What we’re watching: The Third Plenum promised to transfer some local spending responsibilities onto the central government balance sheet.

• This is the only way to shift local government debt onto a sustainable footing.