China’s key financial conference to focus on resolving debt, strengthening supervision amid property crisis

China's top leaders are convening in Beijing for a crucial financial conference this week. The primary focus will be on addressing debt risks and enhancing the supervision of the Communist Party. This closed-door, two-day national financial work conference, which has been held every five years since 1997, is set to commence on Monday. The conference will primarily concentrate on resolving debt issues, with the most pressing concern being the lack of funds in local governments, largely due to the downturn in the real estate market.

Another key point of discussion at the conference will be strengthening the leadership of the party and enforcing financial discipline in the areas of local government debt. The prolonged slump in the property market has sparked increasing concerns over its impact on local government revenues and the future of the world's second-largest economy. In 2018, the central government demanded that local authorities cease accumulating so-called hidden debts, which are informal channels of borrowing often facilitated through local government financing vehicles (LGFVs). LGFVs, hybrid entities that are both public and corporate, were established to circumvent restrictions on local government borrowing and have proliferated since the global financial crisis in 2008.

However, the debt level of LGFVs remains high, with the International Monetary Fund estimating that their total debt has ballooned to a record 66 trillion yuan (US$9 trillion) this year, more than double the 30. 7 trillion yuan in 2017. Ultimately, the central government may have to intervene and bail them out. This necessitates the careful handling of personnel in the financial sector to prevent new aid from being exploited. On Tuesday, Beijing approved the issuance of 1 trillion yuan (US$137 billion) of sovereign bonds, with the proceeds from the sale to be allocated to local governments to aid in reconstruction and enhance disaster prevention and relief capabilities. The new issuance will elevate the budget deficit ratio to approximately 3. 8 per cent of gross domestic product (GDP), significantly exceeding the 3 per cent target set in March.