Rules on lo­cal govt debts to be rewrit­ten

China Daily (Hong Kong) - - BUSINESS - By ZHENG YANGPENG zhengyang­peng@ chi­

The Min­istry of Fi­nance has be­gun draft­ing rules for lo­cal gov­ern­ments’ debt regime, a task that is ex­pected to be com­pleted no late than the end of next year. Hav­ing a sys­tem to match lo­cal govern­ment debt — which could in­crease by 30 tril­lion yuan ($ 4.9 tril­lion) from now to 2020 — with de­vel­op­ment needs is an indis­pens­able part of the na­tional pro­gram to speed ur­ban­iza­tion, ac­cord­ing to fi­nan­cial spe­cial­ists close to the min­istry.

Without reg­u­la­tions or stan­dards for mu­nic­i­pal-level debt fi­nanc­ing, it will be hard for the mar­ket to play a role in al­lo­cat­ing the re­sources needed by China’s many fast-de­vel­op­ing cities, they said.

“The Fi­nance Min­istry is busy com­plet­ing the task, and we are con­tribut­ing in­put,” said Guan Jianzhong, chair­man of the Bei­jing-based Dagong Global Credit Rat­ing Co Ltd.

“The sys­tem should be ready soon, prob­a­bly no later than by the end of next year. What­ever the cen­tral govern­ment is de­ter­mined to have, it can build rather quickly,” Guan added.

A com­plete govern­ment debt regime would re­quire lo­cal gov­ern­ments to not only is­sue debt in­de­pen­dently but also to create bal­ance sheets, file pub­lic fi­nan­cial re­ports and work with credit-rat­ing ser­vices, Guan said.

But it would be risky to open the flood­gates to lo­cal govern­ment fundrais­ing ac­tiv­i­ties be­fore the reg­u­la­tory frame­work is ready, he said.

Build­ing the debt regime fol­lows the re­form ham­mered out by China’s lead­ers at the re­cently com­pleted Third Plenum of the 18th Cen­tral Com­mit­tee of the Com­mu­nist Party of China.

The plan al­lows lo­cal gov­ern­ments to broaden fi­nanc­ing “through var­i­ous ways” that in­clude is­su­ing bonds.

It also prom­ises, without giv­ing a timetable, to set up a “well-reg­u­lated sys­tem” for man­ag­ing lo­cal govern­ment debt and warn­ing of risks.

If they are all im­ple­mented, the changes rep­re­sent a mo­men­tous shift from China’s his­toric ef­forts to “con­tain” lo­cal govern­ment debt to “chan­nel­ing” them in an or­derly way, fi­nan­cial spe­cial­ists said.

It ba­si­cally ac­knowl­edges lo­cal gov­ern­ments’ right to in­cur debt, al­though the na­tion’s cur­rent bud­get laws still ban them from deficit fi­nanc­ing and bond is­su­ing.

To cir­cum­vent the ban, lo­cal gov­ern­ments of­ten bor­row heav­ily through so-called “lo­cal govern­ment fi­nan­cial

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The Fi­nance Min­istry is busy com­plet­ing the task, and we are con­tribut­ing in­put.” GUAN JIANZHONG CHAIR­MAN OF DAGONG GLOBAL CREDIT RAT­ING CO LTD

ve­hi­cles”. But such LGFVs, un­der the lo­cal gov­ern­ments’ di­rect su­per­vi­sion, of­ten are ill-man­aged and breed crony­ism, ex­perts say. With no rule re­quir­ing them to be fi­nan­cially trans­par­ent, the debts raised by these LGFVs have bal­looned in re­cent years. Mar­ket es­ti­mates of the to­tal debt vary be­tween 15 tril­lion and 25 tril­lion yuan.

In July, the Na­tional Au­dit Of­fice was or­dered to con­duct a na­tion­wide au­dit of lo­cal govern­ment debt.

While the re­sults have yet to be re­leased, sev­eral se­nior of­fi­cials said re­cently that the risk of lo­cal govern­ment debt is “un­der con­trol”, sug­gest­ing that the to­tal debt falls within the cen­tral govern­ment’s ac­cept­able level.

But “au­dit­ing is not a so­lu­tion,” Guan said. “Al­though we know how much they’ve bor­rowed, that doesn’t re­flect whether they can re­pay their debts or not.”

As a nec­es­sary step, the na­tional govern­ment debt regime must in­clude qual­i­fied credit rat­ing agen­cies, he said. “They play a role that the au­dit of­fice can­not re­place.”

A bet­ter so­lu­tion, af­ter the au­dit re­sult is dis­closed, is to have a debt man­age­ment sys­tem in which re­sults can be re­ported on a daily ba­sis, ex­perts said.

“China’s ur­ban­iza­tion drive will have a huge fi­nanc­ing de­mand for con­struc­tion of in­fra­struc­ture, farm­land and wa­ter con­ser­van­cies, af­ford­able hous­ing, tourism de­vel­op­ment and so on. Un­der the cur­rent fis­cal sys­tem, lo­cal rev­enue is far from enough,” said Li Xiaopeng, a re­search fel­low with the Ur­ban China Ini­tia­tive, a joint ini­tia­tive led by Columbia Univer­sity, the School of Pub­lic Pol­icy and Man­age­ment at Ts­inghua Univer­sity in Bei­jing and McK­in­sey & Co.

A re­cent study by UCI sug­gested that the cen­tral govern­ment should first ac­knowl­edge the le­git­i­macy of lo­cal gov­ern­ments’ li­a­bil­i­ties and their rights to guar­an­tee. Then lo­cal gov­ern­ments should re­port their debt au­dit re­sults on a reg­u­lar ba­sis, and the cen­tral govern­ment should im­pose a ceil­ing for each prov­ince’s to­tal debt.

Con­sult­ing on the re­port were Na­tional De­vel­op­ment and Re­form Com­mis­sion of­fi­cials.

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