Beijing has tried to reassure the world that it is serious about curbing public sector debt as investors brace themselves for another potentially volatile week for share prices in the world’s second biggest economy.
China placed a 16 trillion yuan (£1.6 trillion) cap on local government debt, announcing that the sector would only be allowed to amass another Y600 billion of borrowing this year.
Borrowing by local government and state enterprises is seen as a key vulnerability for China, adding to widespread nerves about its ability to sustain fast economic growth.
The official Xinhua news agency said total local government debt, including indirect liabilities, grew by 40 per cent last year, to Y17.9 trillion.
The new cap, announced by the standing committee of the national people’s congress, comes as investors focus on China, whose steep share falls last Monday led to a rout in global markets and commodity prices.
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Premier Li Keqiang also moved to calm nerves, saying that China’s economy was growing at a reasonable pace, and defending efforts to steer the country through volatility.
China Construction Bank, the last of the big five banks to report half-year results, did little to allay fears of a slowdown, with the slowest profit growth in at least six years, as margins shrank and more loans soured.
The Shanghai compositeended last week on a more solid footing, helping to calm fears, but it remains 38 per cent lower than its June peak.
The FTSE 100 index ended the week slightly up, however worries remain, not just about China, but about the timing and speed of interest rate rises in the US and UK.
Comments by the governor of the Bank of England, had analysts deferring their estimate for the date of the first rate rise for years. Mark Carney said that events did not yet merit a change in strategy and pointed to the strength of the economy.
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Howard Archer, chief UK economist at IHS, expects a rise in the UK base rate from 0.5 per cent in the first half of 2016. However, the odds now point to the second quarter rather than the first, he said.