Ministry of Finance Bans Use of PPP’s by Local Government to Covertly Increase Debt

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China’s Ministry of Finance plans to launch new measures for standardising public-private partnerships that will strictly ban their use for covert financing purposes by local government.

Shi Yaobin, head of the Ministry of Finance PPP leadership team said to Economic Information Daily that “at present certain local governments are using PPP’s, government service purchases and other methods to engage in covert borrowing, leading to overly rapid growth in debt, and debt ratios that are even in excess of the warning line, creating latent risk trigger points.”

Shi said that PPP reforms over the past three years have achieved laudable results and that the overall trend of development is positive, but the Ministry of Finance has still had to adopt vigorous measures to prevent local government debt risk.

Since the start of the year especially, the Ministry of Finance has expanded its scrutiny of debt guarantees in breach of laws or regulations, and made clearer requirements with respect to the strict prohibition of the use of PPP’s for illicit borrowing.

According to Shi key measures emphasised by MOF will include “strict banning of various uses of PPP’s for covert borrowing,”  as well as the establishment of PPP integrated information platforms for raising information transparency in relation to projects.

China’s central government has sent strong policy signals about the need to tackle local government debt and state-owned enterprise debt as part of a broader, ongoing deleveraging campaign.

President Xi Jinping mooted the introduction of a life-time accountability system for debt incurred by local government officials at the recent National Financial Work Conference, while also declaring deleveraging to be the “priority of priorities.”

While MOF has used the occasion of PPP’s to issue a warning about rapid growth in local government debt, the same department also recently declared that local government debt was “controllable,” and pointed to the success of local government debt ceilings that are subject to the approval of the National People’s Congress.

A report from the Chinese Academy of Social Sciences 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.

 

 

 

 

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