MNI BRIEF: Short-Term China Gov Debt Needed For Monetary Moves

China's government should issue more short-term debt in a bid to align with the need of financial markets as debt issuance will increasingly impact monetary policy operations, Li Yang, chairman of National Institutions of Finance and Development said Friday during 2023 China Financial Street Forum.

The current structure of government debt, mostly longer-dated bonds, has challenged the PBOC’s policy moves as 70% of government debt is held by banks, which has already been monetized, said Li, a high-ranking advisor to the Ministry of Finance and former member of PBOC’s monetary policy committee, noting that 90% local government debt is held by lenders and stressing the risks from the fast expansion of the debt/GDP ratio in recent years.

Higher debt interest payments will restrain space for expansive fiscal policy, and with local governments also struggling to repay their special bonds as the income from land sales has reduced due to economic slowdown and troubled property market, he pointed out, calling for sn effective coordination framework between fiscal and monetary authorities, otherwise, debt issuance and sustainability will become problematic.