The recent war of words between the People’s Bank of China (PBOC) and the Ministry of Finance (MOF) lays bare the urgency – and the scope of disagreement — over how to address the growing debt of local governments. Beijing’s tightening of local borrowing is not only slowing infrastructure investment, but also eroding the country’s financial resilience, with the asset quality of some rural commercial banks deteriorating to the point of failing regulatory requirements. The PBOC vs. MOF debate suggests that Beijing is preparing to provide some level of support for local governments once again, although it remains unclear who will bear the costs.
