A new directive from Beijing clarifying the nature of the official debt ceilings imposed upon local governments could significantly expand borrowing levels by permitting the inclusion of unused amounts from the preceding year.
Beijing has availed itself of formal debt ceilings to help curb borrowing by local government, with President Xi Jinping referring to the deleveraging process as a “priority of priorities” when it comes to reform of the financial system at the recent National Financial Work Conference.
Despite these firm words from Beijing local governments have thus far managed to remain well beneath the official debt ceilings, with both officials and outside analysts noting that regional authorities often resort to covert or disguised means to obtaining financing, via channels such as government procurement contracts and public-private partnership.
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.
Local governments in China may now have even greater latitude to expand their borrowing, following the Ministry of Finance’s issuance of a notice on balancing yields and financing for local government special bonds (关于试点发展项目收益与融资自求平衡的地方政府专项债券品种的通知) (Document 89) on August 2.
The new directive seeks to provide greater clarification on the local government debt ceilings that the central government is using to curb regional leverage, particularly as they apply to the special bonds (also referred to in China as “income”) that are used to raise funds for certain fixed asset projects.
According to the directive local government special debt balances are not permitted to exceed the special debt ceiling, and any special bonds issued as part of trial projects must be included within the special debt ceilings for a region that are approved by the State Council.
The new directive also stipulates for the first time that the new debt ceilings for a given year also include “the part of the debt balance which is less than the ceiling at the end of the previous year.”
According to MoF data the local government special debt balance was 5.53 trillion yuan as of the end of 2016, while the special debt ceiling for the same year was 6.47 trillion yuan.
Following the release of the new directive, this could give local governments the ability to raise a further 940 billion funds this year via special bonds, by allowing them to include their unused borrowing from 2016.
MoF has thus provides for two categories of “special” bonds – those for land reserves and those for toll roads.
According to Document 29, the province-level finance department is responsible for formulating trial work implementation plans for issuance of special bonds based on category, with a focus on clarification on the corresponding projects for the bonds, and striking a balance between their projected income and financing.