Central Government Flags Heavy Pressure on Covert Local Government Debt Growth

China’s central government appears intent upon keeping a lid on “covert borrowing” by the country’s local governments as part of its ongoing deleveraging campaign.

China’s National Development and Reform Commission and the Ministry of Commerce have jointly issued the “Notice on Further Strengthening the Ability of Corporate Bonds to Service the Real Economy, and Strict Prevention of Local Government Debt Risk” (关于进一步增强企业债券服务实体经济能力严格防范地方债务风险的通知).

In keeping with a string of previous policy signals on the matter, the Notice calls for the “strict prevention of local government debt risk, the firm restriction of growth in local government covert debt,” as well as the launch of a “strict prohibition on the use of the public-private partnership model to illegally, illicitly or covertly raise debt and engage in financing.”

With regard to PPP project bond financing, the notice mandates ‘standardisation…a strict PPP model application scope…[and] prudential assessment of government-paid PPP project and viability gap funding PPP project debt risk.”

The Notice further requires the establishment of a sound credit records, the implementation of joint, cross-departmental sanctions, the prompt provision of public notices, as well as the use of “innovative methods” such as the establishment of a social credit system and big data advance warning analysis.

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