New rules focus on local government debt
Print Edition
CHINA issued new rules on handling outstanding local government debt yesterday but left out some controversial provisions that were contained in an earlier draft of the regulations.
China wants to accurately measure the amount of debt outstanding at the local government level by the end of the year, the Ministry of Finance said in new rules published on its website.
Chinese authorities are struggling to manage a massive US$3 trillion in outstanding local government debt, much of it raised by local government financing vehicles (LGFVs) to finance infrastructure and real estate projects.
The ministry added that the government wants to classify the debt and assign responsibility for it to appropriate bodies.
Local governments must divide borrowings into two main categories: debt issued before June 2013 which have been officially audited, and that built up by the end of 2014.
Provincial finance bureaux must report local government debt to the ministry before January 5, 2015, together with estimates of their ability to repay and their plans for doing so, it said.
“The purpose is make outstanding (local) government debt clear so as to lay the foundations to include all government debt into budgets,” the ministry said.
But the announcement yesterday did not include a key provision in the draft, which would have let local governments issue fresh municipal bonds to replace borrowings taken through opaque financing vehicles.
Also absent was a provision granting a grace period to local LGFVs, which suggests local governments would be allowed to continue to rely on these vehicles to raise money to fund projects already under construction.
Instead, China will encourage localities to use a Public-Private-Partnership (PPP) model to help fresh fundraising. The PPP model was not given prominence in the earlier draft.
“The PPP model must be actively promoted so as to encourage social capital to participate in public products and public services while earning reasonable returns,” the ministry said.
“Projects under construction must be given priority to use the PPP model,” it added.
Critics have said that issuing municipal bonds to replace existing fundraising tools will require a massive expansion of China’s fledgling municipal bond market, which was launched this year.
China’s current quota for the muni bond market remains tiny at 109.2 billion yuan (US$17.84 billion) for all of 2014.
The grace period in the draft had raised concerns about China’s determination to deny local governments the LGFV channel for fundraising going forward, analysts had said.
China’s Cabinet in early October said local governments could no longer use LGFVs for future fundraising, as these have been widely criticized for facilitating a rash of irresponsible borrowing and investment in the world’s second-largest economy.
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