The Ministry of Finance has issued a clear warning to local governments in China to get their financial affairs in order as the central authorities step up the battle to curb the growth of “implicit debt” in the year ahead.
“The illusion that the central government will provide a final guarantee should be smashed,” said a report on the website of China’s National Audit Office, quoting the ministry.
To further rein in debt levels next year, the authorities will refuse to approve any construction projects by local governments if they are unable to repay the debt from fiscal revenue, and will tighten regulation on fundraising from financial institutions.
The ministry blamed some local officials eager to rapidly climb the career ladder for borrowing “too much” for construction investment to ramp up GDP growth.
It also ascribed the surging debt level to illegal fundraising from financial institutions, and the belief that local governments are unlikely to go bankrupt as they are supported by fiscal “implicit guarantees”.
“Financing for new projects should be better controlled,” said the report, highlighting that financial institutions are forbidden from providing capital for projects without a stable cash flow or legal guarantees.
The ministry also pledged to enhance controls on debt financing by the country’s centrally administered State-owned enterprises, as some of them provided local governments the money the SOEs had borrowed from banks.
The central government will not “pay the bill” or provide bailouts for local governments and financial institutions when default risks arise, said the report.
These are the new measures the ministry will take to further slow the expansion of local government debt, which last week’s Central Economic Work Conference identified as one of the most dangerous aspects that may spark systemic risks and threaten economic stability in the next three years.
The ministry has sent notices to 10 provincial-level governments ordering them to punish illegal borrowing activities.
To ease local governments’ debt pressure, the debt ceiling, or the highest incremental debt amount for each year approved by the National People’s Congress, the country’s top legislature, could be “moderately” increased, especially to support the construction of public welfare projects, the report said.
Ministry data showed that by the end of 2016, outstanding local government debt was 15.32 trillion yuan ($2.34 trillion), and the debt level was still much below the international alert level.