China to introduce curbs on rising local debts

Finance Minister Xie Xuren said on Thursday that the government will bring in tighter controls on local government debt with the introduction of a new account management system, which will strictly monitor budgets and prohibit any irregular financing or irresponsible spending.

In an article posted on the ministry's website, Xie said government revenues were facing three key challenges in 2013: a tough global economic climate; shrinking profits of enterprises; and further structural tax reform.

As a result, he expected fiscal income growth to be "at a slower pace" during the year.

Outlining the planned account management measures, he said: "We will improve the accounting system for debt management, as well as build an account-checking mechanism between debtors and creditors, which will give us a thorough understanding of local government debt levels at any given time."

In addition, he said, the system will have early warning mechanisms to alert officials to any irregular financing or irresponsible spending, and local government debt balances will be included in budget statements.

The planned measures on local debt come at a time when many authorities are facing rising costs and falling revenues.

Yang Zhiyong, a researcher in fiscal policies with the Chinese Academy of Social Sciences, said: "Rising local expenditure has been putting great pressure on local governments, and increasing financial risk."

The government is giving much more attention this year to the levels of local debt, he said. Government revenue nationwide rose 12.8 percent last year, nearly half the rise in 2011. But expenditure maintained its relatively rapid growth of 15.8 percent.

Analysts have suggested that revenue growth for local governments might have already reached inflection point in 2013.

Some fear that if fiscal growth continues to drop, it could mean revenues will not be enough to pay for China's ongoing economic adjustment and social welfare reforms.

Xu Shanda, the former deputy minister of the State Administration of Taxation, told a recent conference that he expected the country's financial deficit for 2013 to increase 50 percent to 1.2 trillion yuan ($192 billion).

Local authorities are already considering ways of expanding the scope of their debt-raising powers, building closer ties with banks, for instance, to guarantee financing for some major projects, according to a recent report in Shanghai Securities News.

"Debt raising fever by local government finance vehicles may pick up again, which will present considerable risk to their financial positions," added Yang.

Those anxieties were echoed in a report released by Standard & Poor's on Tuesday, which said "the default risk of some sub-provincial governments in China and their financing platforms could rise significantly during the next two years".

S&P said that many local governments may find they have weakening liquidity positions, which combined with a perception of more modest government support, could rein in any new borrowing.

"The risks are particularly high for county-level governments that have incurred high costs from short-term borrowing from non-bank financial institutions," said S&P credit analyst Kim Eng Tan.

"Some local authorities may find themselves trapped in a cycle. They may have to spend more on infrastructure to generate higher receipts from land sales. And that's just so they can reap enough profits from such sales to repay debts incurred earlier for infrastructure investment."

Recent data from Changjiang Securities estimated that China's local debt scale might have grown to 12 trillion yuan by the end of 2012, after 320 billion yuan's worth of spending on infrastructure and 900 billion yuan on urban development over the past two years.

However, S&P said it believes China can avoid any systemic economic risk from local debt because key supporting factors from the past are still in place.

"These include the central government's strong financial strength, its commitment to preventing systemic risk, and China's strong economic fundamentals," added Tan.