Local govts to classify, calculate debt

Must also report outstanding amounts by end of year: MOF

Local governments in China must classify their debt and accurately calculate and report the amount of outstanding local debts incurred by the end of this year, the Ministry of Finance (MOF) said in a statement Tuesday.

The move is aimed at preparations for including the local debt in the national budget and allowing local governments to issue municipal bonds, experts said.

Debt which has been converted into corporate bonds under the Public-Private-Partnership (PPP) model will not be categorized as local government debt, according to the statement posted on the MOF's website.

Debt incurred from projects without capital gains will be classified as general debt, while the debt from projects which are expected to bring in income in the future to partly recover the investments will be classified as special debt, the statement said.

Local governments were also ordered to report their debt to the MOF before January 5, 2015, it said.

The statement also said that local governments should calculate the debt ratio of general and special debt and must offer a clear explanation if the debt ratio exceeds the alert line.

The most important aspect of the new regulation is to distinguish the debt between local governments and enterprises as the line between the two categories was blurred in the past, and under the new regulation, the scope and total volume of Chinese local government debt will be redefined, Yang Zhiyong, a research fellow at the National Academy of Economics Strategy under the Chinese Academy of Social Sciences, told the Global Times on Tuesday.

Due to a huge debt build-up, China banned local governments from raising money through bond sales in 1994.

But local governments have long dodged the ban by setting up companies known as local government finance vehicles (LGFVs) which raise money by taking bank loans, issuing bonds or turning to shadow banking on behalf of local governments.

Local governments had accumulated debt of 17.9 trillion yuan ($2.92 trillion) by the end of June 2013, up 67 percent from the end of 2010, -according to data released by the National Audit Office in June 2013.

Tuesday's rules encourage local governments to use the PPP model to finance new projects in a bid to introduce more private capital into public sector projects and reduce the financing pressure on local governments, experts noted.

The classification of local government debt will largely help assess and reduce risks, and rechecking the total volume of local government debt is an important step toward issuing local bonds, Xiao Peng, a research fellow at School of Public Finance at Central University of Finance and Economics, told the Global Times on Tuesday.

According to rules released on October 2, local governments were prohibited from using LGFVs to finance future projects but instead provincial governments are allowed to issue bonds within a quota set by the State Council, and endorsed by the National People's Congress and its standing committee.

Local governments could issue general bonds to finance general debt projects that will be repaid with government receipts, while issuing special bonds to finance special debt projects that will be repaid with income from the projects, according to the rules.