Let Local Governments Go Bankrupt Like Detroit in 2013: Chinese Central Bank

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One of the Chinese central bank’s senior-most officials has called for Beijing to completely abolish its control of local government bond issuance, and allow municipal and county-level authorities to assume full responsibility for repayment.

In an editorial written for Yicai Xu Zhong, head of the People’s Bank of China’s research department, called for Beijing to fully delegate authority and control over bond issuance to local governments, and allow markets to be the final arbiters of debt quality.

“Eliminate central government control on the scale of local government bond issues, and expand the scale of local government debt issues,” said Xu.

“Whether (bonds) can be issued, and at what price, must be examined and screened by the financial markets. There does not need to be concern over local governments issuing debt chaotically.”

Local government debt is one of the biggest challenges currently confronting China’s economic helmsmen as they endeavour to deleverage the economy.

At a recent meeting the country’s senior-most leadership decided to adopt firm measures to step up regulation of local government debt in 2018, as part of efforts to curb leverage growth and reduce systemic financial risk.

According to Xu a key means of reining in local government debt could be removing the moral hazard created by the implicit assumption that Beijing will always bail out ailing lower-level authorities.

Xu calls for China to follow the lead of the US, which in July 2013 allowed the city of Detroit to file the biggest-ever municipal bankruptcy with a record-breaking $18 billion of debt.

“China must have an example like the bankruptcy in Detroit,” said Xu. “Only if we allow local state-owned firms and governments to go bankrupt will investors believe the central government will break the implicit guarantee.”

Xu’s editorial follows the publication of a report by China’s National Audit Office over the weekend calling for the central government to rescind the “illusion” that it will bail out heavily indebted local governments.

 

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