China’s debt issues loom as Beijing revamps financial regulation

  • The centralization of Chinese financial regulation unveiled at the 2023 National People’s Congress strikes many investors as sign of Beijing’s concern about the big debts piled up by local governments and their off-budget funding vehicles.
  • Under the changes made at its annual parliamentary session, China’s existing banking and insurance regulator will be replaced by a new agency called the National Financial Regulatory Administration. The People’s Bank of China will focus more on macro-economic issues and less on financial regulation.
  • As a policy matter, the changes reflect a desire to shift towards financial stability and de-risking the financial exposure of local governments and financial institutions.
  • The finances of local governments are a complicated subject in China because so much of their debt comes in the form of non-budgetary items such as borrowings by local government funding vehicles, or LGFVs. As a result, discussion of public finances in China often focuses on official borrowings as well as the other kinds, which the International Monetary Fund terms as “augmented debt”.
  • The IMF says augmented public debt in China rose from CNY64.5tn (USD9.25tn) in 2017 to CNY132.3tn in 2022 — equivalent to 110% of Chinese nominal gross domestic product. Over the same period, official government debt rose from 30 trillion yuan, including CNY16.5tn at the local level, to CNY61.9tn, of which CNY35.3tn was local.

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