China's central bank says risks from local government debt have dropped

cnbc.com:

BEIJING — China's financial risks have dropped, including from local government debt, People's Bank of China Governor Pan Gongsheng said in state media interviews published late Thursday.

Pan also said the central bank will work with the Ministry of Finance to enable China to reach its full-year growth targets. He said that monetary policy would remain supportive.

Beijing has increasingly prioritized addressing risks from high debt levels in the real estate sector, which is closely linked to local government finances. International institutions have long called on China to reduce its ballooning debt levels.

«China's overall financial system is sound. The overall risk level has significantly declined,» Pan said in an interview released by state broadcaster CCTV. That's according to a CNBC translation of the transcript.

He noted that «the number and debt levels of local government financing platforms are declining,» and that the cost of their debt burden has «dropped significantly.»

Local government financing vehicles emerged in China in the last two decades to enable local authorities, who couldn't easily borrow directly, to fund infrastructure and other projects. LGFVs primarily obtained financing from shadow banking.

The lack of regulatory oversight often meant indiscriminate funding of infrastructure projects with limited financial return. That raised the debt burden on LGFVs, for which the local governments are responsible.

Coordinated efforts in the last year by local governments, financial institutions and investors have «alleviated the most pressing repayment needs of the weakest LGFVs and boosted market sentiment,» S&P Global Ratings analysts said in a July 25 report, one year since Beijing made a concerted effort