China aims to regulate local bodies’ debt

Vice finance minister said risks posed by debt under control

Beijing, July 28: China will resolutely curb the rise in hidden local government debt via “disguised channels”, although risks posed by the overall government debt load are generally under control, finance ministry officials said on Friday.

In recent years, the government has tightened controls on new local government debt to help ward off risks following a borrowing binge since the global financial crisis.

Local governments will be prevented from obtaining “disguised financing” via local government financing vehicles (LGFVs), Wang Kebing, deputy director general of the ministry’s budget department, told a news conference.

Authorities will also prevent local governments from using the public-private partnership (PPP), government investment funds and government procurement services as “disguised channels” for raising debt, Wang said.

Local governments can only issue bonds within the annual quota set by the parliament, although their “reasonable” financing demand will be met, Wang added.

LGFVs will be transformed into state-owned companies responsible for their own profits and losses, Wang said, reaffirming a ban on local governments providing guarantees for debt issued by such vehicles.

Authorities must strictly regulate local government debt-raising activities and halt illegal debt guarantees, the cabinet said after a regular meeting.

Resolving local debt risks was important to ensure China’s economic and fiscal sustainability and financial safety, the cabinet said.

Chinese vice finance minister Liu Wei told the same news conference that risks posed by local and central government debt combined were generally under control.

Overall government debt was equivalent to 36.7 per cent of GDP in 2016, which was lower than that of major economies and most emerging market economies, he said.

In May, Moody’s Investors Service downgraded China’s credit ratings for the first time in nearly 30 years, saying it expected the financial strength of the economy to erode in coming years as growth slows and debt continues to rise.

China’s total private and public debt has exceeded 250 per cent of GDP, up from 150 per cent before the global financial crisis, according to the Organisation for Economic Cooperation and Development (OECD).

China’s tax cuts and reduction in various fees would lower the burden for companies by more than $148.36 billion this year, the ministry said.