Lo­cal gov­ern­ments must set debt lim­its

China Daily (Canada) - - TOP NEWS - ByWANG YANFEI wangyan­fei@ chi­nadaily.com.cn

The Min­istry of Fi­nance is­sued a guide­line on Wed­nes­day to reg­u­late lo­cal govern­ment debt lev­els, the lat­est top-level doc­u­ment is­sued af­ter an emer­gency plan to fend off debt risks came out in early Novem­ber.

The guide­line re­quires lo­cal gov­ern­ments to set their own lim­its to avoid break­ing the debt ceil­ing ap­proved by the na­tion’s top leg­is­la­ture.

The Min­istry of Fi­nance set this year’s debt fi­nanc­ing limit at 1.18 tril­lion yuan ($171 bil­lion) — 780 bil­lion yuan worth of mu­nic­i­pal bonds and 400 bil­lion yuan in con­struc­tion bonds.

The guide­line was is­sued af­ter an emer­gency plan was re­leased un­der which the min­istry for the first time an­nounced four types of debt risks and cor­re­spond­ing emer­gency re­sponses. Lo­cal au­thor­i­ties, which won’t be bailed out by the cen­tral govern­ment, must choose from re­sponses in­clud­ing scal­ing down in­fra­struc­ture in­vest­ment, re­duc­ing govern­ment ex­pen­di­tures, mak­ing use of land sales and sell­ing as­sets.

Liu Xiaochuan, head of Shang­hai Univer­sity of Fi­nance and Eco­nom­ics’ China In­sti­tute of Pub­lic Fi­nance, said the un­der­ly­ing mes­sage of the guide­line is that the cen­tral govern­ment is try­ing stricter reg­u­la­tion and im­proved trans­parency to curb debt risks at the pro­vin­cial and mu­nic­i­pal lev­els.

Although debt has not reached alarm­ing lev­els, a lack of trans­parency while lo­cal gov­ern­ments bor­row and in­vest to meet in­fra­struc­ture needs is a hid­den risk, he said.

How­ever, cur­rent ef­forts might not be enough to pre­vent fi­nan­cial risks, ac­cord­ing to Liu.

“It might be bet­ter to put the debt ceil­ing into leg­is­la­tion, be­cause pro­vin­cial au­thor­i­ties can pro­tect them­selves from ac­count­abil­ity by ad­just­ing their lo­cal ceil­ings af­ter they sub­mit their lim­its,” Liu said. The cen­tral govern­ment should make it clear when lo­cal au­thor­i­ties must sub­mit their lim­its and not al­low them to later change the limit, he added.

Out­stand­ing debt of lo­cal gov­ern­ments added up to 16 tril­lion yuan by the end of last year, re­main­ing well below the risky level, com­pared with other coun­tries, ac­cord­ing to Robin Xing, chief China econ­o­mist at Mor­gan Stan­ley.

Xing added that the cen­tral govern­ment “will need to bal­ance well be­tween hit­ting the an­nual growth rate tar­get and fend­ing off fi­nan­cial risks next year”.

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