Ministry of Finance Claims Success in Curbing Local Government Debt


Beijing says that government debt risk still lies within “controllable” limits, while also resolving to dissipate accumulated local government financial risk and control growth in “covert” credit.

At a press conference held by the State Council Information on 28 July, vice-head of the Ministry of Finance Liu Wei said that China’s government debt ratio stood at 36.7%, well below the “emergency” threshold of 60% in the EU, as well as levels of key emerging economies.

“We contend that government debt risk is controllable overall,” said Liu. “Our response is rational, as well as one in which we have confidence.”

On the same date the Standing Committee of China’s State Council announced plans to “actively and appropriately dissipate accumulated local government debt risk, and firmly control growth in covert debt.”

Local government debt and state-owned enterprise debt were key focal points of China’s recent National Financial Work Conference, which made mention of the launch of a “lifetime accountability” system for any debt raised by local government officials.

According to Liu the Ministry of Finance is implementing restrictions on local government debt to control its growth, and will include local government debt in budget management procedures in future.

Since the start of the year the Ministry of Finance has issued a slew of documents with a view to standardising local government debt and controlling covert growth.

The Ministry has also penalised the governments of major provinces, including Chongqing, Henan, Hubei and Shandong, for providing illicit debt guarantees by either dismissing culpable officials or issuing administrative penalties.

Speaking to National Business Daily Zheng Chunrong, professor at the Shanghai University of Finance and Economics, said that in order to control the scale of local government debt China had adopted local government debt ceilings, which have thus far remained well above the actual debt balance.

Earlier this year the Fifth Session of China’s 12th National People’s Congress (NPC) gave its approval to ceiling of 18.82 trillion yuan for local government debt for 2017, while China’s local government debt balance as of the end of June was 15.86 trillion yuan.

Nationwide local government debt stood at 15.32 trillion yuan at the end of last year, well below the ceiling of 17.19 trillion yuan approved by the NPC.

Despite the reassurances of the Ministry of Finance, a report released last week by the Chinese Academy of Social Sciences National Institution for Finance & Development in conjunction with China Zheshang Bank indicates that the Chinese government’s share of total credit has increased in recent years.

The report entitled “Where’s the Money?: Fund Flows and Mechanisms Under the the Broader Asset Management Framework” ( 钱去哪了:大资管框架下的资金流向和机制) indicates that in 2016 the Chinese government accounted for 20% of 182 trillion yuan in the country’s total credit, for an increase of 5 percentage points compared to 2009.

Local government debt was exclusively responsible for the increase, with its share rising from 4% in 2009 to 14% last year, heavily overcompensating for a decline in the central government’s share from 11% to 7% over the same period.