China remains determined to curb local governments’ debt risks in 2018, as the authorities continue the crackdown on illegal fundraising activities, Finance Minister Xiao Jie said on Dec 27.
The country’s local government debt risk is likely to no longer remain “hidden”, especially when the money is raised from the government’s investment fund and illegal public-private partnership projects, the minister warned at an annual ministry meeting, which announced the major tasks for 2018.
“The incremental part should be strictly controlled, while the existing debt should be prudently reduced, avoiding any emergence of new risks,” Xiao said at the meeting.
Local officials should take responsibility for their fundraising activities and a stronger campaign to further investigate the debt status of provincial-level governments will start in the new year, according to the ministry.
Analysts said the moves will effectively tame the new debt expansion. Measures which are “too aggressive” may stimulate unexpected risks including a break in the financing chain or bond defaults, so the debt reduction process should be “step-by-step”.
To guard against local debt risks, China has stepped up the management of local government debt with improved regulation and strengthened inspection of irregularities in local financing.
“Local debt risks are under control,” according to a recent statement from the National Audit Office.
The central government will then press local governments to improve quota and budget management and speed up the replacement of existing debt, said Xiao.
A debt ceiling for each year is set by the new budget law, which took effect in 2015.
The growth of the implicit debt, which is usually from private equity, trusts and even “shadow banking”, contributed to the major risks as it is difficult to calculate or manage.
Xu Zhong, head of the research institution of the People’s Bank of China, the nation’s central bank, said boosting the independent right of bond issuance for local governments would be an effective way to curb the debt risk.
Xu suggested scrapping central government controls on the bond-issuing scale of local governments, and allowing the market to determine the bond price.
“Market-oriented reform is the key to removing implicit guarantee of local governments, and a more transparent financial market can play a significant role in reducing illegal fundraising,” he said.