China’s Ministry of Finance (MOF) is set to establish a dedicated department to oversee government debt, according to Caixin. The new debt department will be created by converting the ministry’s existing policy research department, sources close to the ministry and local finance department officials told Caixin.
Financial health is at the heart of any system, and the amount of debt held across entities in a country can have an impact on its overall stability. It is hard to know the extent of China’s debt, due to the lack of transparency in the system, but the move suggests that China’s leadership recognize that there is a fairly serious issue at hand, and are taking steps to address the problem.
For China, the most serious debt risks are with local governments, whose historical income sources of land sales are dwindling, and second in the banking system, which has been under pressure to provide a wide range of loans—many of which may be at risk of becoming non-performing, given the current financial pressures on businesses.
The impact of China’s debt can be somewhat balanced by the control the system has over the country’s finances, but at the end of the day, debt has to either be paid back or written off. With the current economic headwinds in the country, debt is going to be harder to pay off, and there are no clear candidates for institutions that would be able to absorb any write offs.