21 Trillion Yuan Ceiling on Chinese Local Government Debt Set for 2018


China’s Ministry of Finance has set a debt ceiling for local governments in 2018, as part of efforts to deleverage the economy and contain systemic financial risk.

On 26 March the Ministry of Finance issued its “Notice Concerning Properly Performing 2018 Local Government Debt Administration Work” (关于做好2018年地方政府债务管理工作的通知), outlining a total of 13 measures for “strengthening full-gain management of local government debt, and appropriately dissolving accumulated debt risk.”

In order to contain regional financial risk the Notice sets a ceiling of 21 trillion yuan for local government debt in 2018.

The Notice also stipulates that local governments are not permitted to “exceed their actual financial capabilities by making excessive use of the debt amounts approved for a higher-tier government themselves, or issuing it lower-tiers of government.”

The Ministry of Finance issued provisional administrative measures on debt quotas last year, indicating that quotas would be allocate to those regions with “stronger finances, greater space for debt-raising, low debt risk, and strong debt-management performance.”

In 2017 the new debt quota was 2.18 trillion yuan, while figures from the Ministry of Finance indicate that as of the end of 2017 the local government bond balance was 14.74 trillion yuan, accounting for 90% of the local government debt balance, and leading to a reduction in local government interest payments of approximately 1.2 trillion yuan.

The Chinese central government indicated that it will put greater pressure on local government debt in 2018, and in particular the growth of “hidden debt” which is raised by authorities via illicit means.

A key part of this crackdown will involve “opening the front door” of fund-raising via municipal bond issuance, while “shutting the back door” to illicit forms of financing.

The Notice also flags the accelerated use of debt swaps to dispose of local government debt, as well as mandates improvements to “local government debt risk assessment and early warning mechanisms,” the adoption of effective measures for gradually dissolving risk in high-risk regions, and the research and formulation of restraint measures for the investment and financial conduct of governments in high risk regions.

An official from the Ministry of Finance said to Yicai that if creditors do not agree to convert local government debt in to government bonds within a set timeframe, the original debtor will continue to bear repayment responsibility, while the corresponding local government debt quota will be uniformly withdrawn by the central government.