PBOC may take steps on local govt debt strain

China's central bank is likely to provide low-cost funding for commercial banks assisting certain local governments in addressing their debt strain, underlining the country's growing emphasis on defusing local government debt risks, experts said.

Their comments echoed the remarks of Pan Gongsheng, governor of the People's Bank of China, who said in a China Central Television interview on Friday that the central leadership "pays great attention to" the local government debt risks in some provinces, with policy support for resolving the risks necessary.

Specifically, the central bank will provide regions facing relatively heavy debt burdens with emergency liquidity support when necessary, Pan said at a forum on Wednesday, which experts said will likely come in the form of a special purpose vehicle, or SPV, a monetary policy tool.

Yang Haiping, a researcher at the Central University of Finance and Economics' Institute of Securities and Futures, said Pan's words signaled that the launch of the SPV should be in the pipeline.

Yang said the SPV is most likely to provide low-cost funding, in the form of relending, for commercial banks which engage in mitigating the liquidity strain of local government financing vehicles, or LGFVs, by extending loan maturity, providing refinancing, swapping high-cost debt with low-cost loans and other measures. LGFVs refer to entities set up by local governments to raise funds for infrastructure and public welfare projects.

The SPV will help ease the banks' pressure of falling interest revenue from LGFVs, Yang added.

According to Pan, the central bank has encouraged financial institutions and local governments to negotiate in such aspects as reducing loan interest rates or adjusting the debt maturity structure.

Analysts at China Securities estimates that the SPV may inject 480 billion yuan ($65.8 billion) in liquidity at most — equivalent to cutting the reserve requirement ratio by 0.25 percentage points — and aid the risk mitigation of debt worth 1.2 trillion yuan.

Apart from such targeted support, experts said the PBOC is expected to maintain an ample liquidity level and a low-interest rate environment in general to ensure monetary conditions favorable for debt risk resolution.

Yuan Haixia, executive dean of the research institute of credit rating agency CCXI, said it may be necessary to tamp down deposit and benchmark interest rates to keep commercial banks' funding costs low, which will create more scope for them to ease LGFVs' debt burden.

Expecting the Chinese government to "step up easing materially" in the coming months, Goldman Sachs has raised its forecast for China's economic growth next year from 4.5 percent to 4.8 percent, Reuters reported on Thursday.

In the CCTV interview, Pan also said that the financial risks of the real estate sector are controllable, with households' considerable demand for better homes underpinning the sector's steady development prospects in the long term.

The emphasis on containing real estate market risks is also seen in a central bank report on Thursday, which reiterated that it will optimize real estate policies in due course to adapt to major changes in the supply-demand relationship in the real estate market.

The tone-setting central financial work conference has urged efforts to promote a virtuous cycle between finance and real estate and implement a long-term mechanism on handling local government debt risks, while pledging measures to promote high-standard financial opening-up.

Efforts will be made to widen the access to China's financial markets further and improve the liquidity condition of renminbi financial assets, the PBOC said in an article on Thursday.