Lo­cal govt debts get high-level at­ten­tion

Meet­ing sin­gles out mu­nic­i­pal fi­nances as an ur­gent item on bud­get agenda

China Daily (Hong Kong) - - BUSINESS - BY ZHENG YANGPENG zhengyang­peng@ chi­nadaily.com.cn

China has iden­ti­fied “con­tain­ing lo­cal gov­ern­ment debt risk” as a ma­jor task for next year’s eco­nomic pol­icy, un­der­scor­ing Bei­jing’s grow­ing con­cern about lo­cal gov­ern­ments’ ex­ces­sive bor­row­ing. In an an­nounce­ment fol­low­ing the an­nual Cen­tral Eco­nomic Work Con­fer­ence, the Com­mu­nist Party of China vowed to treat the debt is­sue as a crit­i­cal task and promised to put dif­fer­ent kinds of debt un­der broader bud­get man­age­ment.

“Gov­ern­ments at var­i­ous lev­els have to be held ac­count­able for gov­ern­ment debt within their ju­ris­dic­tions. Ed­u­ca­tion and eval­u­a­tion should be strength­ened to put right any in­cor­rect of­fi­cial per­for­mance ori­en­ta­tion,” the an­nounce­ment read.

An­a­lysts said the fact that the meet­ing sin­gled out the is­sue in­di­cated its se­ri­ous­ness. Be­cause the cur­rent bud­get laws ban lo­cal gov­ern­ments from deficit fi­nanc­ing and bor­row­ing di­rectly, nu­mer­ous “lo­cal gov­ern­ment fi­nan­cial ve­hi­cles” (LGFVs) have been set up in the past few years to feed their gi­gan­tic con­struc­tion fi­nanc­ing needs. With no rules re­quir­ing them to be fi­nan­cially trans­par­ent, the debts raised by th­ese LGFVs have bal­looned. Mar­ket es­ti­mates of the to­tal debt vary be­tween 15 tril­lion yuan ($2.5 tril­lion) and 25 tril­lion yuan.

Mar­ket fear of the prob­lem grew so strong that the Na­tional Au­dit Of­fice in July started a na­tion­wide au­dit of lo­cal gov­ern­ment debt. It is thought the au­dit is com­pleted but the re­sults have yet to be re­leased.

“Lo­cal gov­ern­ment-re­lated debt poses risks for banks, sov­er­eign and lo­cal gov­ern­ments,” a re­cent re­port by Moody’s In­vestors Ser­vice said. “Chi­nese banks’ large ex­po­sure to LGFVs, many of which have weak stand­alone credit qual­ity, ex­poses banks to po­ten­tial losses from bad loans.”

Li Yan, a lo­cal gov­ern­ment fi­nanc­ing an­a­lyst with China Chengxin In­ter­na­tional Credit Rat­ing Co Ltd, said var­i­ous debts could be put un­der the “gov­ern­ment­funded bud­get” or “the State cap­i­tal bud­get”, mak­ing them more trans­par­ent.

China cur­rently runs four bud­gets — the gen­eral bud­get, the gov­ern­ment-funded bud­get, the State cap­i­tal bud­get and the so­cial se­cu­rity fund bud­get. Un­like the gen­eral bud­get, how the other three bud­gets are specif­i­cally run is not dis­closed to the pub­lic. The lat­est com­mit­ment to “put var­i­ous debts un­der broader bud­get man­age­ment” means the opaque LGFVs would be sub­jected to greater trans­parency, an­a­lysts said.

“The con­sen­sus now is lo­cal gov­ern­ments should be granted the abil­ity to bor­row di­rectly, which could ul­ti­mately lead to greater trans­parency. A stan­dard mu­nic­i­pal bond mar­ket should also be de­vel­oped,” Li said.

Her re­search showed that in­creas­ingly, LGFVs are spend­ing more on re­pay­ing in­ter­est on loans. In 2012, in­ter­est pay­ments rep­re­sented 13.9 per­cent of the to­tal cash flow into LGFVs, up from 10.39 per­cent in 2010. A to­tal of 69.5 per­cent of ma­tured loans are re­paid by new loans, rather than rev­enue gen­er­ated by the projects.

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