China faces challenges from “mismanagement” of some companies, says central bank chief

The Chinese economy “is doing well” but faces challenges such as the risk of default by certain companies due to “mismanagement”, said the governor of the People’s Bank of China (BPC), Yi Gang.

In recent weeks, concern has grown about the possible collapse of the Chinese property developer Evergrande Group , which has more than $ 300 billion in liabilities and has defaulted on three rounds of interest payments on its dollar bonds.

As the company grapples with its debt, concerns have intensified about possible contagion of credit risk from Chinese real estate to the broader economy.

Yi Gang said that the default risks of some companies and the operational difficulties of small and medium banks are some of the challenges for the Chinese economy, and that the authorities are closely monitoring “so that they do not become systemic risks.”

Although growth has moderated due to a sporadic increase in coronavirus infections, the Chinese economy is expected to grow 8% this year, Yi said at an online meeting of the Group of 30 International Banking Seminar, which coincides with the annual meetings of the International Monetary Fund and the World Bank.

Authorities will first try to prevent Evergrande’s problems from spilling over to other real estate companies to avoid broader systemic risk, he added.

The crisis at Evergrande and other large homebuilders sent the debt market risk premiums of weaker Chinese companies to a record high last week and triggered a new round of credit rating downgrades.

“The interest of creditors and shareholders will be fully respected in accordance with the law. “The law has clearly indicated the priority of liabilities,” Yi said.

Authorities will give the highest priority to the protection of consumers and home buyers, while respecting the rights of creditors and shareholders, he said.

The BPC was taking various measures to defend itself against financial risks, such as capital replenishment for small and medium-sized banks, Yi Gang said.

The world’s second largest economy has seen an impressive rebound after the pandemic, but there are signs that the recovery is losing momentum.

“Economic growth has slowed down a bit, but the trajectory of the economic recovery has not changed,” he said.

On the development of the digital yuan, Yi Gang commented that the BPC will focus on its domestic and retail use, as cross-border and international use was “a bit complicated” due to requirements on issues such as money laundering.

“We will cooperate closely with the central banking community,” he said, adding that using the digital yuan as a tool to promote China’s Belt and Road initiative “is not our priority at the moment.”