Lo­cal govt debt, de­spite chal­lenges, is con­trol­lable

China Daily (Hong Kong) - - BUSINESS - By QIAO BAOYUN

China is tack­ling the chal­lenges brought about by the pile-up of lo­cal govern­ment debt, but lo­cal govern­ment debt it­self is a ne­c­es­sary fi­nan­cial tool to sup­port the con­struc­tion of lo­cal in­fra­struc­ture.

In­ter­na­tional ex­pe­ri­ence has shown that the ap­pro­pri­ate divi­sion be­tween cen­tral and lo­cal govern­ment’s fis­cal ex­pen­di­ture re­spon­si­bil­i­ties is bound to re­quire lo­cal govern­ment play an im­por­tant role.

That is in the con­struc­tion of in­fra­struc­ture and the pro­mo­tion of lo­cal eco­nomic devel­op­ment, through the op­ti­mal al­lo­ca­tion of lo­cal govern­ment debt re­sources.

With its rapid eco­nomic growth, the prob­lem of in­ad­e­quate in­fra­struc­ture is par­tic­u­larly acute in China, and the role of lo­cal govern­ment debt has be­come in­creas­ingly im­por­tant. That debt in­creased from 10.7 tril­lion yuan ($1.6 tril­lion) in 2013 to about 15.4 tril­lion yuan at the end of 2014, ac­cord­ing to the Na­tional Au­dit Of­fice.

China has grad­u­ally es­tab­lished a lo­cal govern­ment debt man­age­ment frame­work. It has se­lected a model, putting the debt un­der a sys­tem of quota man­age­ment. The State Coun­cil has also es­tab­lished a lo­cal govern­ment debt risk assess­ment and early warn­ing mech­a­nism, emer­gency dis­posal mech­a­nism and ac­count­abil­ity sys­tem.

The Chi­nese lo­cal govern­ment debt man­age­ment frame­work is ef­fec­tive. By the end of 2016, lo­cal govern­ment debt was 15.32 tril­lion yuan. In­clud­ing cen­tral govern­ment debt of 12.01 tril­lion yuan, to­tal govern­ment debt was 27.33 tril­lion yuan, with the debt-to-GDP ra­tio at 36.7 per­cent, which is lower than the level in ma­jor mar­ket economies and emerg­ing mar­ket economies, in­di­cat­ing that the over­all risk is con­trol­lable.

There is still a long way to go for China to im­prove its lo­cal govern­ment debt man­age­ment.

First, debt man­age­ment must be strength­ened. In some cases, for ex­am­ple, some lo­cal gov­ern­ments bor­row or pro­vide guar­an­tees in vi­o­la­tion of laws and rules in var­i­ous ways, and this may be­come a ma­jor hid­den risk and must be stemmed.

The Min­istry of Fi­nance should con­tinue to ef­fec­tively su­per­vise lo­cal govern­ment ser­vice pro­cure­ment, reg­u­late bud­get man­age­ment for govern­ment ser­vice pro­cure­ment and pro­hibit il­le­gal fi­nanc­ing by the use of real or fab­ri­cated govern­ment ser­vice pro­cure­ment con­tracts.

It should re­quire lo­cal gov- ern­ments to im­prove dis­clo­sure of in­for­ma­tion for govern­ment ser­vice pro­cure­ment, and clar­ify re­quire­ments for var­i­ous kinds of co­op­er­a­tion be­tween govern­ment and so­cial in­vestors.

Sec­ond, China should fur­ther de­velop the lo­cal govern­ment bond mar­ket. In­ter­na­tional prac­tices show that to ef­fec­tively man­age lo­cal govern­ment debt, a coun­try must give full play to the role of the mar­ket to bal­ance lo­cal govern­ment fi­nanc­ing ac­tiv­i­ties.

Third, reg­u­la­tion should be strength­ened to solve the “back door” prob­lem. While the “front door” is open for lo­cal govern­ment debt, the “back door” of bor­row­ing in vi­o­la­tion of laws and rules by some lo­cal gov­ern­ments has not been closed com­pletely.

With­out lo­cal self-dis­ci­pline, reg­u­la­tion and re­straint alone can only be a tem­po­rary so­lu­tion and may even be trapped in a game of cat and mouse.

To es­tab­lish a long-term mech­a­nism to pre­vent lo­cal govern­ment debt risk, China also needs to fur­ther deepen the re­form of the fis­cal sys­tem and eco­nomic sys­tem, in par­tic­u­lar the trans­for­ma­tion of govern­ment func­tions. It would es­tab­lish more rea­son­able fis­cal re­la­tions be­tween cen­tral and lo­cal gov­ern­ments and make lo­cal gov­ern­ments change their minds from just not be­ing will­ing to touch the red line, to not dar­ing to touch the red line.

lo­cal govern­ment debt at the end of last year cen­tral govern­ment debt

The au­thor is a re­searcher with the Chi­nese Govern­ment Debt Re­search Cen­ter, Cen­tral Univer­sity of Fi­nance and Eco­nom­ics.

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