Provincial Authorities Intent on Squeezing Local Government Debt in 2018

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Provincial governments around China are dialling up their regulation and scrutiny of local government debt at Beijing’s behest as part of efforts to forestall systemic financial risk.

At China’s recent National Financial Work Conference senior policymakers indicated that 2018 would be a year when the Chinese government would place special emphasis upon “effectively preventing and controlling local government debt risks, firmly reining in illegal and non-compliant financing and guarantee behaviour, and strictly preventing the covert raising of funds via government investment funds, public-private partnerships or government service procurements.”

China’s provincial governments have already responded to Beijing’s clarion call, with Zhejiang, Chongqing, Shaanxi, Guangdong and Tianjin all issuing directives in relation to local government debt, setting timetables for the disposal of debt risk as well as clarifying emergency handling measures for province-level debt risk.

Authorities for the affluent coastal province of Zhejiang that surrounds Shanghai have issued the “Zhejiang Province People’s Government Opinions Concerning the Control and Resolution of Local Government Debt Risk,” which seeks to expedite measures for the resolution of debt risk and ensure that debt ratio levels “fall beneath the warning line” by 2020.

Zhejiang province has also issued a “Zhejiang Province Local Government Debt Risk Emergency Handling Plan,” which mandates that high risk regions “pragmatically implement a five year debt disposal plan” to bring local government debt risk indices within the “warning line” within five years.

In the southern Chinese manufacturing hub of Guangdong province, the provincial government has issued its own “Guangdong Province Government Debt Risk Emergency Handling Plan,” which outlines various mechanisms for dealing with local government debt contingencies.

Other province have flagged the launch of stern measures for containing local government debt, with Jiangsu province calling for the “strengthening of regulation and control of risk in relation to government-invested projects,” and a moratorium on approvals for all projects that exceed government debt thresholds.

The government of the inland megalopolis of Chongqing has said that it will “firmly prevent methods for shoring up growth that depend upon excessive debt raising…and making overdrafts on the future.”

In other parts of the country the provinces of Jilin and Jiangsu have also mooted measures for strengthening assessments of local government debt risk, and curbing increases in levels of “hidden debt.”

Analysts say that while China’s overall levels of local government debt remain “controllable” at present, in some parts of the country the issue of covert or illicit debt remains an issue.

A key form of illicit debt raising for local government includes the use of bank loans, entrusted loans, various debt instruments and asset management products via local financing platforms, that are backed by local government guarantees.

Another key method involves “covert” debt raising via non-compliant PPP’s, government investment funds or government service procurement.

Jiang Zhen (蒋震), a researcher from the China Finance Strategy Research Institute at the Chinese Academy of Social Sciences, said to Economic Information Daily that there are three areas means for tackling local government debt risk.

The first is optimisation of debt tenors, given that at present many local governments are using short-term debt for long-term investment. According to Jiang the matching of financial project resources and terms is a problem in urgent need of resolution.

The second area is strict local government-debt budgeting, to ensure a “one-to-one correspondence” between debt sources and repayment sources, while the third area is strict control of covert methods of debt raising such as PPP.

 

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