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November 15, 2016

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Home » Business » Finance

China set to tackle local debt risks

Source: Xinhua | November 15, 2016, Tuesday | Print Edition

BY floating an emergency plan for local government debt risks yesterday, China has addressed an issue that has made headlines for years.

The four-grade emergency plan, which could mean “fiscal rebalancing” on the part of local governments, is a precautionary arrangement, said experts.

“We should make it clear that no crisis has ever occurred. The plan is more like a barrier against risk,” said Zhao Quanhou, director of the financial research office of the Research Institute for Fiscal Science at the Ministry of Finance.

Data from the ministry showed total local government debt in China stood at 16 trillion yuan (US$2.3 trillion) at the end of 2015 with a 38.9 percent debt-to-GDP ratio — lower than the 60 percent alert line of the European Union and other major economies.

With Grade I being the most serious, classification is based on the nature and impact of any incident, according to the State Council notice.

City and county governments will fiscally rebalance if their annual interest payments on general debt are 10 percent higher than their public spending budgets, or if interest on special debts is 10 percent above their government fund budgets.

“The fiscal rebalancing act is actually a rearrangement of government budgets. It is different from debt restructuring or a government bankruptcy plan,” said Zhang Bin, a researcher with the Chinese Academy of Social Science.

According to the plan, once the local government launches fiscal rebalancing, it should take measures — such as clearing up overdue taxes and owed fees, reducing expenditures and disposal of government assets — to restore fiscal balance, guaranteed by the basic public service and effective operation of the government.

A senior ministry official said the precautionary arrangement is consistent with the nation’s Budget Law and serves as a powerful measure to strengthen local government debt management.

Yesterday’s notice reaffirmed the central government will not become involved in bailouts and local government officials involved in graded incidents will be held accountable, even if they leave office.

While Chinese authorities have said the nation’s debt risks are controllable, they still face challenges at the local level featuring illegal financing guarantees and fake public-private partnerships.

At the end of 2015, Zhejiang, Sichuan, Shandong and Henan provinces owed 15.35 billion yuan in outstanding debt involving irregularities, latest data with the National Audit Office showed.

Local government debts soared during an investment and construction binge following the global financial crisis in 2008.

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