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<figure class="wp-block-image size-full"><img loading="lazy" decoding="async" width="929" height="523" src="https://cms.cnbcafrica.com/wp-content/uploads/2024/08/108021270-1723768369491-gettyimages-2157639739-CHINA_LUJIAZUI_FORUM.jpeg" alt="" class="wp-image-519571" srcset="https://cms.cnbcafrica.com/wp-content/uploads/2024/08/108021270-1723768369491-gettyimages-2157639739-CHINA_LUJIAZUI_FORUM.jpeg 929w, https://cms.cnbcafrica.com/wp-content/uploads/2024/08/108021270-1723768369491-gettyimages-2157639739-CHINA_LUJIAZUI_FORUM-300x169.jpeg 300w, https://cms.cnbcafrica.com/wp-content/uploads/2024/08/108021270-1723768369491-gettyimages-2157639739-CHINA_LUJIAZUI_FORUM-820x462.jpeg 820w, https://cms.cnbcafrica.com/wp-content/uploads/2024/08/108021270-1723768369491-gettyimages-2157639739-CHINA_LUJIAZUI_FORUM-160x90.jpeg 160w, https://cms.cnbcafrica.com/wp-content/uploads/2024/08/108021270-1723768369491-gettyimages-2157639739-CHINA_LUJIAZUI_FORUM-768x432.jpeg 768w" sizes="auto, (max-width: 929px) 100vw, 929px" /><figcaption class="wp-element-caption">Pan Gongsheng, governor of the People’s Bank of China (PBOC), during the Lujiazui Forum in Shanghai, China, on Wednesday, June 19, 2024.  Bloomberg | Bloomberg | Getty Images</figcaption></figure>



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&amp;P Global Ratings analysts said in a July 25 report, one year since Beijing made a concerted effort to reduce LGFV risk.



However, the report said LGFV debt “remains a big problem.” The analysis found that more than 1 trillion yuan ($140 billion) of LGFV bonds are due to mature over the next couple of quarters, while such debt growth remains in the high single digits.



Exacerbating debt challenges is China’s slowing growth. The economy grew by 5% in the first half of the year, raising concerns among analysts that the country would not be able to reach its target of around 5% growth for the full year without additional stimulus.



The International Monetary Fund on Aug. 2 said in its regular review of China’s financial situation that macroeconomic policy should support domestic demand to mitigate debt risks.



“Small and medium-sized commercial and rural banks are the weak link in the large banking system,” the IMF report said, noting China has nearly 4,000 such banks that account for 25% of total banking system assets.



<h2 class="wp-block-heading" id="h-addressing-real-estate"><a></a>Addressing real estate</h2>



The number of high-risk small and medium-sized banks has dropped to half of what it was at their peak, Pan said via state media on Thursday, without sharing specific figures.



In real estate, he pointed out the mortgage down payment ratio has reached a record low of 15% in China, and that interest rates are also low. Pan noted central authorities are helping local governments with financing so they can acquire property and turn them into affordable housing or rental units.



Property and related sectors once accounted for at least one-fourth of China’s economy. But in recent years Beijing has sought to shift the country away from relying on real estate for growth, toward advanced tech and manufacturing.



Pan’s public comments come after a week of heightened volatility in the government bond market.



Earlier on Thursday, the PBOC made the rare decision to delay a rollover of its medium-term lending facility in favor of a 577.7 billion yuan capital injection via another tool called the 7-day reverse repurchase agreement. Pan highlighted that 7-day tool in June when discussing PBOC efforts to revamp its monetary policy structure.



The PBOC is scheduled Tuesday morning to release its monthly loan prime rate, another benchmark rate. The central bank cut the 1-year and 5-year loan prime rates by 10 basis points each in July, after keeping the 1-year unchanged for 10 straight months, and the 5-year unchanged for four months.

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<figure class="wp-block-image size-full"><img loading="lazy" decoding="async" width="1200" height="675" src="https://cms.cnbcafrica.com/wp-content/uploads/2024/08/108020266-1723639428249-gettyimages-2160057485-UK_YORK.png" alt="" class="wp-image-519226" srcset="https://cms.cnbcafrica.com/wp-content/uploads/2024/08/108020266-1723639428249-gettyimages-2160057485-UK_YORK.png 1200w, https://cms.cnbcafrica.com/wp-content/uploads/2024/08/108020266-1723639428249-gettyimages-2160057485-UK_YORK-300x169.png 300w, https://cms.cnbcafrica.com/wp-content/uploads/2024/08/108020266-1723639428249-gettyimages-2160057485-UK_YORK-820x461.png 820w, https://cms.cnbcafrica.com/wp-content/uploads/2024/08/108020266-1723639428249-gettyimages-2160057485-UK_YORK-160x90.png 160w, https://cms.cnbcafrica.com/wp-content/uploads/2024/08/108020266-1723639428249-gettyimages-2160057485-UK_YORK-768x432.png 768w" sizes="auto, (max-width: 1200px) 100vw, 1200px" /><figcaption class="wp-element-caption">A guided tour in the center of in York, UK, on Friday, June 7, 2024. Bloomberg | Bloomberg | Getty Images</figcaption></figure>



The U.K. economy grew by 0.6% in the second quarter of the year, the Office for National Statistics said Thursday, continuing the country’s cautious recession rebound.



The reading was in line with the expectations of economists polled by Reuters and follows an expansion of 0.7% in the first quarter.



Economic growth was flat in June, in line with a Reuters poll, as activity in the U.K.’s dominant services sector dipped 0.1%. Construction and production output rose by a respective 0.5% and 0.8% in the month.



The British economy has recorded slight but steady growth almost every month so far this year, as the U.K. exits a shallow recession. GDP was also flat in April, when wet weather quelled retail sales and construction output.



On an annual basis the economy was 0.9% bigger in the second quarter, against a forecast of 0.8%.



“These figures confirm that the UK’s recovery from recession picked up steam in the second quarter, despite strike action and wet weather causing activity to flatline in June,” Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said in a note.



“The UK’s strong second quarter owes more to temporary momentum from the large recent falls in inflation and a boost to consumer spending from events like Euro 2024 than from a meaningful improvement in the UK’s underlying growth trajectory,” Thiru continued.



The pace of growth is unlikely to continue into the second half amid weaker wage growth, high interest rates and supply challenges, Thiru added.



U.K. inflation rose to 2.2% in July, data published Wednesday by the ONS showed, coming in slightly below a consensus forecast of 2.3%. The headline figure had been at the Bank of England’s 2% target rate for the two months prior, helping spur the central bank’s decision to cut interest rates by 25 basis points at the start of August.



The July figures were described by analysts as supportive of consistent monetary easing through the rest of the year, despite stubbornness in services inflation.



Over the April-June period, U.K. wage growth excluding bonuses cooled to a two-year low, but remained relatively hot at&nbsp;5.4%.



Richard Carter, head of fixed interest research at Quilter Cheviot, said lower interest rates should “help stimulate more economic growth by making borrowing more affordable for households and businesses” in the coming months — but noted that it would take time for the impact to be felt.



The British pound ticked slightly higher following Thursday’s GDP release, and was up by 0.1% against the U.S. dollar and 0.2% against the euro at 7:35 a.m. in London.



Institutions including the International Monetary Fund, investment bank Goldman Sachs and the Bank of England have all hiked their growth forecasts for the U.K. economy in recent months. The IMF now sees growth of 0.7% this year, up from 0.5% previously.



Factors cited include the decline in inflation and reforms to planning and business rules planned by the new Labour government, which took office in July. Prime Minister Keir Starmer and Finance Minister Rachel Reeves have repeatedly stated that boosting economic growth will be the bedrock of their policymaking, setting a target for the U.K. to achieve the fastest per capita GDP growth among the Group of 7 nations.



“The new Government is under no illusion as to the scale of the challenge we have inherited after more than a decade of low economic growth and a £22 billion black hole in the public finances,” Reeves said in a statement Thursday.



Labour is due to deliver its first budget on Oct. 30, with analysts saying the announcement will give more clarity on the government’s fiscal strategy and plans for changes to taxation and public spending.



Because of this, “it is unlikely that we will see a marked acceleration in GDP in the short term,” said Quilter Cheviot’s Richard Carter.



“For now, the economy is expected to continue on its relatively moderate growth path, bolstered by wage growth that remains ahead of inflation and the recent easing of monetary policy,” he added.

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Inflation rose as expected in July, driven by higher housing-related costs, according to a Labor Department report Wednesday that is likely to keep an interest rate cut on the table in September.



The consumer price index, a broad-based measure of prices for goods and services, increased 0.2% for the month, putting the 12-month inflation rate at 2.9%. Economists surveyed by Dow Jones had been looking for respective readings of 0.2% and 3%.



Excluding food and energy, the core CPI came in at a 0.2% monthly increase and a 3.2% annual rate, meeting expectations.



The annual rate is the lowest since March 2021, while the core is the lowest since April 2021, according to the Bureau of Labor Statistics report. Headline inflation was 3% in June.



A 0.4% rise in shelter costs was responsible for 90% of the all-items inflation increase. Food prices climbed 0.2% while energy was flat.



Stock market futures were mildly negative after the report, while Treasury yields were mostly higher.



Though food inflation was soft on the month, multiple categories saw sizeable increases, most notably eggs, which were up 5.5%. Cereals and bakery items declined 0.5% while dairy and related products fell 0.2%.



Inflation readings have been gradually drifting back to the central bank’s 2% target. A report Tuesday from the Labor Department showed that producer prices, a proxy for wholesale inflation, rose just 0.1% in July and were up 2.2% year over year.



Fed officials have indicated a willingness to ease, though they’ve been careful not to commit to a specific timetable nor to speculate about the pace at which cuts might occur. Futures market pricing currently points to a slightly better chance of a quarter percentage point reduction&nbsp;at the Fed’s next scheduled meeting, Sept. 17-18,&nbsp;and at least a full point in moves by the end of 2024.



“Today’s CPI print removes any lingering inflation obstacles that may have been preventing the Fed from starting the rate cutting cycle in September,” said Seema Shah, chief global strategist at Principal Asset Management. “Yet, the number also suggests limited urgency for a 50 basis point cut.”



As inflation has eased, percolating concerns about a slowing labor market seemed to have raised the likelihood that the Fed will start cutting for the first time since the early days of the Covid crisis.



“Coming down, but the sticky areas continue to be sticky,” Liz Ann Sonders, chief investment strategist at Charles Schwab, said in describing the CPI report. “We have to keep a close eye on both the inflation data as well as the employment data.”



There were several crosscurrents in the report that indeed suggest inflation is stubborn in some areas.



Automotive prices continued to decline, with new vehicles down 0.2% and used cars and trucks off 2.3% for the month and 10.9% from a year ago. However, auto insurance costs climbed another 1.2% and are up 18.6% on a 12-month basis.



On the shelter component, which makes up more than one-third of the index, an item that asks property owners what they could get in rent increased 0.4% and was up 5.3% annually, again defying Fed expectations for an easing in housing-related costs.



On the other hand, multiple categories showed signs of deflation on the month, including medical care services (-0.3%), apparel (-0.4%) and core commodity prices (-0.3%).

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<figure class="wp-block-image size-full"><img loading="lazy" decoding="async" width="1920" height="1080" src="https://cms.cnbcafrica.com/wp-content/uploads/2024/08/SXlrcXW.jpg" alt="" class="wp-image-518376" srcset="https://cms.cnbcafrica.com/wp-content/uploads/2024/08/SXlrcXW.jpg 1920w, https://cms.cnbcafrica.com/wp-content/uploads/2024/08/SXlrcXW-300x169.jpg 300w, https://cms.cnbcafrica.com/wp-content/uploads/2024/08/SXlrcXW-820x461.jpg 820w, https://cms.cnbcafrica.com/wp-content/uploads/2024/08/SXlrcXW-160x90.jpg 160w, https://cms.cnbcafrica.com/wp-content/uploads/2024/08/SXlrcXW-768x432.jpg 768w, https://cms.cnbcafrica.com/wp-content/uploads/2024/08/SXlrcXW-1536x864.jpg 1536w" sizes="auto, (max-width: 1920px) 100vw, 1920px" /><figcaption class="wp-element-caption">A worker labels copper products at Truong Phu cable factory in northern Hai Duong province, outside Hanoi, Vietnam August 11, 2017. Kham | Reuters</figcaption></figure>



Commodity prices have tumbled over the past month, signaling underlying weakness in the global economy despite the U.S. stock market bouncing back from recession fears.



U.S. stocks recovered most of their losses last week in the wake of a steep sell-off triggered by weak labor and manufacturing data. Investors have sought to look past recession fears, with some analysts arguing that U.S. economic fundamentals remain on a solid footing.



But commodity markets may be telling a different story about the global economy. The Invesco DB Base Metals Fund is down more than 7% over the past month, while crude oil futures dropped 14% from July 5 through Aug. 5.



“In terms of commodities, the entire asset class is coming under pressure,” Rob Ginsberg, managing director at Wolfe Research, told clients in a Friday research note.



“Outside of gold, you would be hard pressed to find a positive set-up,” Ginsberg said. “We see this broad decline in commodity prices as yet another warning about the state of the economy.”



Copper in particular is viewed as a signal of what is likely to happen with the economy, said Bart Melek, global head of commodity strategy at TD Securities.



Copper soared earlier this year on expectations of a super-cycle in which demand would outstrip supply due to the metal’s role as a key input in growth industries such as electric vehicles, semiconductors and renewable energy.



But copper futures have pulled back 21.4% from the 2024 high of $5.19 per pound on May 20 to trade at $4.089 as of Monday morning. Futures are down nearly 12% over the past month.



“We’ve got the narrative of the super-cycle, this wonderful world of battery vehicles, dissipating very, very quickly,” Melek told CNBC. “No one is really talking about it anymore.”



Weakness in China, the world’s second-largest economy, is weighing on copper and oil in particular, Melek said. Global manufacturing data also hasn’t been “gangbusters,” he said. It is likely that copper and oil are facing surpluses rather than the tight market that some analysts had expected, the analyst said.



“We didn’t get extremely supportive fiscal stimulus in China,” Melek said. “There were a lot of bets out there, particularly on the discretionary side, that China will deliver some sort of a stimulus that will lift their economy.”



Though oil has found support from ongoing geopolitical tensions in the Middle East, weak demand in China has weighed on the market for months. OPEC on Monday lowered its global oil demand growth forecast this year by 135,000 barrels per day as expectations in China have softened.



“Both energy markets and base metal markets and copper do reflect a slower economic environment where there is likely to be less demand growth that reduces the risk of undersupply conditions,” Melek said.



At the same time China’s economy is sputtering, the U.S. is leaning into protectionism, imposing tariffs against Beijing on everything from electric vehicles, to batteries, to semiconductors and solar modules. The European Union announced tariffs on Chinese EVs in July, with Beijing filing a complaint at the World Trade Organization on Friday



“That just means that there is less free flow of stuff from there to here,” Melek said. “If we impose tariffs, that means higher prices. Almost by definition, for any level of demand, you get less of it with tariffs.”



The market is waiting on the latest reading of the consumer price index Wednesday and commentary out of the annual meeting of central bankers in Jackson Hole, Wyoming next week. A rate cut by the Federal Reserve in September has largely already been priced in, Melek said.



“I’m not sure the market gets all that excited,” Melek said of the expected rate cut. TD Securities is pricing in a 25 basis point cut, though the Fed might become more optimistic about doing 50 basis points if the CPI data on Wednesday comes in weak, he said.

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Falling commodity prices are indicating there is trouble brewing with the economy

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Desirèe Henry looks back at her first Olympics

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

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