China issues rules to control debt risks
Print Edition
CHINA’S State Council yesterday published rules to strengthen the supervision and management of local government debt.
It is its first document aimed at controlling the risks posed by local government debts that are in their trillions of yuan.
Auditing results indicate that risks from government debts are generally controllable, according to a brief statement posted on the central government’s official website.
But the statement added that there are some risks and problems related to borrowing, management and fund use that need to be addressed.
The State Council is requiring the establishment of an integrated management mechanism for local government debt, which will cover borrowing, use of funds, and repayment.
Late last year, China disclosed details of government debt.
Auditing results showed that debt directly incurred by local governments was 10.88 trillion yuan (US$1.77 trillion) at the end of June 2013. The debt guaranteed by local governments at various levels amounted to 2.66 trillion yuan, and debt governments might have some liability for stood at 4.34 trillion yuan.
The State Council’s statement came a month after the National People’s Congress, China’s legislature, passed a long-awaited set of amendments to the country’s Budget Law on August 31.
The revision marked an important milestone in fiscal reforms and paved the way for local governments to formally issue bonds on China’s bond market.
The old version of the Budget Law banned local governments from issuing bonds. But in practice they sought back doors to raise funds by taking loans from banks and issuing bonds via their local government funding vehicles (LGFVs). This money has been unsupervised.
According to the State Council document, governments of the 32 provincial-level regions on the Chinese mainland will be allowed to borrow within a quota set by the central government.
The quota needs to be approved by the NPC or its standing committee.
Prefecture-level and county-level governments can commission the provincial governments to borrow, if necessary.
The document also requires that local governments no longer borrow money through LGFVs or corporate channels.
Money raised through municipal bonds may only be used to fund public services and pay existing debt, but not government operations.
Debts arising from bond issuance must be included in the local government budget.
The State Council will set up a system for assessing local government debt risks and establish mechanisms for early warning, emergency response and accountability.
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