New rule to tackle local govt debt

Move aimed at increasing financial transparency

China released on Wednesday a new rule to help build a complete and transparent budgetary system in a bid to tackle the pressing local government debt crisis and revamp the way that local governments borrow and manage their debt.

The new rule is in accordance with the country's recently amended budget law, which aims to improve budgetary management, according to a statement posted on the central government's website on Wednesday.

Under the new rule, provincial governments are allowed to issue bonds within a quota set by the State Council, China's cabinet, and endorsed by the National People's Congress (NPC) and its standing committee.

The local debts must be included in provincial budgets and will be supervised by the provincial people's congresses.

China's Ministry of Finance will assess the risk in local debt and issue warnings if the risk is out of control.

"Local governments are liable to repay their debts - the central government will not [necessarily] bail them out," it said.

Furthermore, local government debt will be associated with the political performance of local officials, and they will be held accountable for debt defaults, according to the new rule.

"The new rule is an important step toward developing well-regulated, open and transparent budgetary management [throughout the country]," said Yang Zhiyong, a research fellow at the National Academy of Economics Strategy under the Chinese Academy of Social Sciences.

A key aspect of the rule is to include local government debt management as a performance indicator for local leaders, as the punishment system will prevent them from making unjustified rampant borrowing decisions, Yang told the Global Times on Wednesday. They will now be held accountable for such decisions, Yang noted.

However, open and transparent budgetary control depends on proper implementation. "It is easy to publish a budget figure, but more information is needed, such as what the borrowed money is used for," he said.

The rule is intended to make implicit local government debt explicit and to prevent default risks from building up, Zhu Weiqun, a professor at the School of Public Economics and Administration at Shanghai University of Finance and Economics, told the Global Times on Wednesday.

Further details about the punishment mechanism should be offered, such as how and under which conditions local government decision makers will be held accountable, Zhu said.

As local government officials are appointed by the central government, it will be difficult to punish them if they are simply shifted to another place, he noted.

The NPC passed a revision to the budget law on August 31 for the first time since it took effect in 1995. The revision is intended to remove ambiguity and close loopholes in managing the trillions of yuan involved in State fiscal revenue and spending.

The country has witnessed ballooning local government debt following the 4-trillion-yuan ($650 billion) stimulus program and subsequent lending spree that was launched in 2009-10 to bolster economic growth after the global financial crisis.

Chinese local governments had accumulated outstanding debt of 17.9 trillion yuan by the end of June 2013, up 67 percent from end of 2010, according to official data.

As local governments were banned under the original Budget Law from issuing bonds directly, many in practice have sought backdoor funding through local government-backed financing firms, which borrowed from banks on their behalf, mostly to fund infrastructure.

Such opaque practices are off the radar for central regulators, leading to potential default risks that could imperil the country's financial system.

Backdoor financing practices used by local officials to circumvent the original rules convinced top leaders that the only way to slow the growth in China's local debt was to set up a transparent budgetary supervision mechanism.

The revised law gives the green light to bond sales by provincial governments but places them under strict supervision with detailed regulations.