China on course to con­tain lo­cal gov­ern­ment debt risks

China Daily (Hong Kong) - - BUSINESS - By ZHENG CHUNRONG

China has in­tro­duced a se­ries of ad­min­is­tra­tive mea­sures and estab­lished a full-cov­er­age and all-round risk preven­tion and con­trol sys­tem in re­cent years to en­sure that lo­cal gov­ern­ment debt man­age­ment is in­creas­ingly stan­dard­ized.

With the im­ple­men­ta­tion of the new Bud­get Law in 2015 and rel­e­vant reg­u­la­tions, China has set up a num­ber of mech­a­nisms con­cern­ing lo­cal gov­ern­ment debt man­age­ment, in­clud­ing debt quota man­age­ment, bud­get man­age­ment, early risk warn­ing, emer­gency dis­posal, and debt re­place­ment. It has also taken timely mea­sures to strengthen lo­cal gov­ern­ment debt

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man­age­ment by stop­ping lo­cal gov­ern­ments from bor­row­ing in dis­guised forms, such as gov­ern­ment ser­vice pro­cure­ment and co­op­er­a­tion be­tween gov­ern­ment and so­cial in­vestors.

In re­cent years, China has made con­tin­u­ous progress in lo­cal gov­ern­ment debt man­age­ment fol­low­ing the prin­ci­ples of le­gal­iza­tion, stan­dard­iza­tion and mar­ket ori­en­ta­tion.

The newly re­vised Bud­get Law makes it clear that lo­cal gov­ern­ments can only bor­row by is­su­ing lo­cal gov­ern­ment bonds, and may not bor­row in any other way.

At the same time, bond is­suance has been con­ducted in a more mar­ket-ori­ented way and in­for­ma­tion dis­clo­sure has im­proved, which helps give play to the role of mar­ket mech­a­nism in curb­ing lo­cal gov­ern­ment bor­row­ing.

In 2015, for ex­am­ple, the Min­istry of Fi­nance made a com­pre­hen­sive pro­vi­sion on lo­cal gov­ern­ment bond in­for­ma­tion dis­clo­sure for the first time, and then con­tin­ued to raise the in­for­ma­tion dis­clo­sure re­quire­ments and re­fine the con­tent of in­for­ma­tion dis­clo­sure. The im­prove­ment in in­for­ma­tion dis­clo­sure is con­ducive to the ra­tio­nal pric­ing of in­vestors and the im­prove­ment of the mar­ket level of the bond mar­ket.

In the next few years, with the deep­en­ing of lo­cal gov­ern­ment debt re­form, China’s lo­cal gov­ern­ment bond mar­ket will usher in a rapid development phase and play an im­por­tant sup­port­ing role in lo­cal eco­nomic and so­cial development.

Re­gard­ing the re­cent problem of law-breach­ing debt is­suance or bor­row­ing in dis­guised forms by lo­cal gov­ern­ments, China has im­ple­mented a se­ries of mea­sures to strengthen reg­u­la­tion and in­ten­si­fied ef­forts to in­ves­ti­gate law-break­ing ac­tiv­i­ties and kept peo­ple con­cerned ac­count­able, with a view to strictly en­forc­ing fi­nan­cial and eco­nomic laws and reg­u­la­tions.

In May 2017, the Min­istry of Fi­nance, the Na­tional Development and Re­form Com­mis­sion, the Min­istry of Jus­tice, the Peo­ple’s Bank of China, the China Bank­ing Reg­u­la­tory Com­mis­sion, and the China Se­cu­ri­ties Reg­u­la­tory Com­mis­sion jointly is­sued a no­tice on fur­ther reg­u­lat­ing the bor­row­ing-based fi­nanc­ing ac­tiv­i­ties of lo­cal gov­ern­ments and fur­ther reg­u­lated the fund­ing and guar­an­tees pro­vided by lo­cal gov­ern­ments to their fi­nanc­ing ve­hi­cles, as well as the op­er­a­tions of var­i­ous PPP pro­jects and gov­ern­ment in­vest­ment funds.

Mean­while, the au­thor­i­ties have also re­quired fi­nan­cial in­sti­tu­tions to strictly strengthen their fi­nanc­ing man­age­ment to im­prove risk iden­ti­fi­ca­tion and preven­tion, and pru­dently eval­u­ate the bor­rower’s fi­nan­cial abil­ity and re­pay­ment sources. In par­tic­u­lar, in the event of law-breach­ing bor­row­ing ac­tiv­i­ties, not only the lo­cal gov­ern­ment and its depart­ment and af­fil­i­ated lo­cal gov­ern­ment fi­nanc­ing ve­hi­cles are held ac­count­able, the fi­nan­cial in­sti­tu­tions, in­ter­me­di­ary in­sti­tu­tions, le­gal ser­vice agen­cies and even the in­di­vid­u­als con­cerned will also be pun­ished. These mea­sures in­crease the cost of vi­o­lat­ing the laws and reg­u­la­tions as well as the ef­fi­ciency of pol­icy im­ple­men­ta­tion.

To sum up, China has over­come se­vere chal­lenges in car­ry­ing out the lo­cal gov­ern­ment debt re­form in re­cent years. The direction of re­form is clear, the mea­sures are ef­fec­tive, and the progress is im­pres­sive.

The au­thor is as­so­ci­ate dean of the In­sti­tute of Pub­lic Pol­icy and Gov­er­nance at Shang­hai Univer­sity of Fi­nance and Eco­nomics

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