China on course to contain local government debt risks

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 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