State-owned Enterprises Banned From Financing Chinese Local Government

China’s Ministry of Finance has put the kibosh on state-owned finance enterprises providing financing to local governments outside of bond purchases, as part of broader efforts to prevent and reduce risk in relation to local government debt.

The Ministry of Finance has just released its “Notice Concerning Problems in Relation to Standardising the Financing and Investment Conduct of Financial Enterprises in Relation to Local Government and State-owned Financial Enterprises” (关于规范金融企业对地方政府和国有企业投融资行为有关问题的通知).

The Notice stipulates that state-owned financial enterprises are banned from providing any form of financing to local governments and their departments, whether directly or via indirect means such as local state-owned enterprise and institutions, with the exception of the purchase of local government bonds.

The Notices also prohibits state-owned financial enterprises from making “illegal increases in local government financing platform loans, demanding that local governments illegally or illicitly provide guarantees or undertake repayment liabilities, or providing debt-based funds as capital for local government construction projects, government investment funds, or public private partnerships.

“At present some local governments continue to suffer from problems in relation to illicit, illegal or covert debt raising,” said one official at the Ministry of Finance according to The Beijing News

“Debt raising methods are becoming more diverse each day, and risk is continually increasing.

“The reasons for this include some local government party and political leaders as well as cadres having a perspective on political accomplishment that is incorrect, and failure of project examination and approval authorities to properly implement their duties.

“Additionally, some financial enterprises have also exacerbated this problem.”

China’s central government has indicated that local government debt will be one of its key focal areas for deleveraging and financial risk prevention work going ahead, putting a ceiling on local government debt of 21 trillion yuan for 2018.

 

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