China Set to Contain Regional Debt Risk via Assessment-based Quotas

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Domestic sources expect regulators to accelerate efforts to contain hidden local government debt risk, after the issue was heavily stressed by the Chinese central bank’s latest economic work meeting.

Sources said to Cailian She that they expect regulators to “grade” local governments on their bonds, hidden debt scope and debt ratios, to use as the basis for curbs on the issuance of new debt.

According to sources Chinese exchanges are currently waiting for the results of the grading process from regulatory authorities, in order to inform their review and assessment of new issues of debt by local government.

Authorities may refuse to provide new quotas to those regions with higher debt ratios, while those with moderate debt ratios may be allowed to obtain quotas sufficient for the rollover of existing debt, and those whose debt ratios that are low will remain unaffected.

In 2019 China’s Ministry of Finance (MOF) established a “Local Government Debt Risk Grading Assessment System” (地方政府债务风险等级评定制度), which calculated regional debt ratios as the local government bond balance plus hidden debt divided by total financial resources.

Under the system a debt ratio of 300% or more is categorised as red, a debt ratio of between 200% and 300% is categorised as orange, a debt ratio of between 120% and 200% is categorised as yellow, and a debt ratio of under 120% is categorised as green.

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