Stricter management of local govt debt necessary

The Ministry of Finance has reportedly already set the ceiling for local governments’ new debt in 2022 at 1.46 trillion yuan ($228.9 billion).

That comes earlier than usual and gives the local governments a clear direction to manage their debts.

Debt is a “double-edged sword”. Good use of borrowed money can promote economic development. Poor management can easily evolve into a ”gray rhino”, causing huge financial risks.

Although local government debt risks are generally controllable and the hidden debt risks of local governments have been steadily released in recent years, the debt risks in some places are prominent, and some are even severe, and must be taken seriously, according to the ministry, whose ultimate goal is to completely eliminate all hidden debts nationwide.

To prevent and resolve debt risks, the focus should be on regulating the issuance and use of special bonds.

Some indebted regions will necessarily face solvency risks if they issue too many bonds. Judging from the supervision by the State Council and audits at all levels, there are problems such as idle funds and illegal misappropriation in some places.

In addition, the special bonds must rely on the project’s own income to repay the debt.

Therefore, it is necessary to strengthen standardized management and risk prevention of the whole process of issuing, using and managing of the special bonds of local governments.

The special bonds issued by local governments must be incorporated into the budget and subject to the oversight of the local people’s congress, thus tightening budgetary constraints.

And the central government must ensure local governments are aware that it will not bail out local governments by helping them to repay their debts.

That means in the process of issuing and using special bonds, information disclosure and market constraints should be strengthened. The management and performance of special bonds must be improved, those responsible for the ineffective use of the funds should be held accountable.