China’s 5th National Financial Work Conference has turned the spot upon reining in the rampant growth of local government debt.
President Xi Jinping said at the conference that “all party committees and governments must…strictly control local government debt increases,” and called for the implementation of a system of full life accountability as part of “establishing a correct political performance perspective.”
Experts point to a massive disparity between local government debt and the borrowing levels approved by the central government, with Caixin previously reporting that as of the end of 2015 the balance of hidden local government debt approached 35 trillion yuan, despite the standing committee of the National People’s Conference approving local government debt of only 16 trillion yuan.
A key source of off-balance sheet funding for local governments is the wealth management products supplied by banks, spurring a huge growth in China’s shadow banking sector.
The system of full life accountability proposed by the National Financial Work Conference will see the inclusion of local government debt within the scope of accountability for party and political leaders, in a bid to stymie its rampant growth as well as further standardise local government financing practices.
The mooting of full life accountability system for local government debt has prompted Chinese commentators to ask how the system will be implemented, what matters will warrant accountability and to whom the system will apply.
China International Capital Corporation’s fixed income research group said the conference will expand regulatory coordination with respect to exposing and punishing local government borrowing in breach of regulations.
In December of 2016 the Ministry of Finance issued its ” Temporary Measures on the Implementation of Supervision of Local Government Debt by Local Finance Inspection Specialist Personnel Office,” at which time it told journalists that the strengthening of accountability systems would be a key means of improving the administration of local government debt.
According to the Ministry of Finance specialist local personnel offices will be responsible for inspecting and uncovering problems in relation to breaches of laws and regulations, as well as prompt handling of related issues.
At the start of 2017 the Ministry of Finance also sent missives to the provincial governments and financial regulators of Chongqing, Inner Mongolia, Henan, Sichuan and Shandong, advocating the implementation of an accountability system for certain municipalities and counties when it came to the illegal raising of debt or provision of guarantees.