Remarkable progress achieved in China's local government debt reform,debt risk effectively curbed

By Professor Zheng Chunrong

The new Budget Law coming into effect in 2015 establishes the direction of China's local government debt management reform. In accordance with the established direction of reform, the Chinese government introduced a series of administrative measures in recent years, a full-coverage and all-round risk prevention and control system has been formed, local government debt management has been increasingly standardized, and the debt size, structure and field have been more transparent and rational. It can be said that China's local government debt management has entered a new era, there is a qualitative leap in the level of government debt management, and the debt risk has been effectively curbed.

Local government debt has become a hot topic in China. [Photo: hexun.com]

I. The local government debt management has been increasingly scientific, fine and efficient

After the implementation of the new Budget Law and the Opinions of the State Council on Strengthening the Administration of Local Government Debts (Guo Fa [2014] No. 43), on the one hand, the Chinese government constantly refines the provisions in laws and policies, establishes a number of mechanisms concerning local government debt, including debt quota management, budget management, early risk warning, emergency disposal, debt replacement, to make the debt management system show improvement and become more scientific and operational; on the other hand, in view of the new situation and new trend of local government financing, the Chinese government takes timely measures to strengthen management, stops local governments from borrowing in disguised forms, such as government service procurement and cooperation between government and social capital, to defuse the risk. In recent years, China made continuous progress in local government debt management following the principles of legalization, standardization, and market orientation, not only reflecting the coherence and consistency of its policies, but also showing that the local government debt management of the Chinese government is increasingly mature and further deepened.

II. The local government bond market develops healthily and can meet reasonable local demand

The newly revised Budget Law makes it clear that local governments can only borrow by issuing local government bonds, and may not borrow in any other way. In recent years, the Chinese government accelerated the improvement of the local government bond system, developed the local government bond market, established and improved a sound local government debt financing mechanism, and achieved positive results. Since the implementation of the new Budget Law, China's local government bond market has developed rapidly. In 2015-2017, the newly issued local government bonds were 600 billion yuan, 1180 billion yuan and 1630 billion yuan, respectively, growing faster and well meeting the local reasonable financing demand. At the same time, the degree of marketization of bond issuance and the degree of information disclosure are increasing, which help give play to the role of market mechanism in curbing local government borrowing. First, improve the local government bond system. The Chinese government develops revenue bonds for self-seeking balance between project proceeds and financing, launched pilot implementation in the areas of land reserves and toll roads in 2017, ensures that the maturity of bonds is appropriate to the duration of projects, designs specific bonds according to the return on projects and project assets, achieves the internalization of risk. These measures facilitate investors to accurately assess the risk of bond investment, avoid bad investment expectations, and make the bond market to better play its bond pricing function. Second, develop the local government bond market. The Chinese government has introduced a number of measures to expand local government bond trading sites, broaden the scope of investors and improve bond liquidity. For example, in December 2016, Shanghai municipal government successfully issued 3 billion yuan of local government bonds to institutional investors in the free trade area and foreign countries; in July 2017, Shanghai Stock Exchange successfully launched a pilot project to allow the participation of individual investors in subscription of local government bonds, gradually broadening the scope of investors. In July 2016, local government bonds were included in the scope of collaterals subject to cash management of the central treasury and the local treasury, banks were allowed to pledge local government bonds to the central bank for funds, helping to boost bond liquidity. Third, improve the level of marketization of local government bonds. In 2015, the Ministry of Finance made a comprehensive provision on local government bond information disclosure for the first time, and then continued to raise the information disclosure requirements and refine the content of information disclosure. The improvement in information disclosure is conducive to the rational pricing of investors and the improvement of the level of marketization of the bond market. The degree of marketization of debt pricing has been gradually improved. The issuing rate of local government bonds is close to that of central government bonds in provinces with higher fiscal revenue, while the issuing rate of local government bonds is generally 10%-15% higher than that of central government bonds in provinces with lower fiscal revenue.

In the next few years, with the deepening of local government debt reform, China's local government bond market will usher in a rapid development phase and play an important supporting role in local economic and social development.

III. Regulate local government financing activities and severely punish illegal financial and economic activities

In view of the borrowing in violation of laws and rules or borrowing in disguised forms by local governments recently, the Chinese government implements a series of measures to strengthen regulation and intensifies the efforts to investigate and handle the law-breaking activities and keep the persons concerned accountable, with the aim to strictly enforce financial and economic laws and regulations. First, in May 2017, Ministry of Finance, National Development and Reform Commission, Ministry of Justice, People's Bank of China, China Banking Regulatory Commission, and China Securities Regulatory Commission jointly issued the Notice on Further Regulating the Borrowing-Based Financing Activities of Local Governments (Cai Yu [2017] No. 50), to further regulate the funding and guarantee provided by local government to local government financing vehicles as well as the operations of various PPP projects and government investment funds, prevent local governments from borrowing in violation of laws and rules and/or borrowing in disguised forms, meanwhile, to strengthen the constraints on financial institutions and require financial institutions to strictly regulate their financing management, effectively strengthen risk identification and prevention, prudently evaluate the borrower's financial ability and repayment source in accordance with the business judgment rules. In particular, in the event of borrowing in violation of laws and rules, not only the local government and its department and affiliated local government financing vehicles are held accountable, the financial institution, intermediary institution, legal service agency, and even the individuals concerned are also punished. These measures increase the costs of violating the laws and regulations as well as the efficiency of policy implementation. Second, in May 2017, the Ministry of Finance promulgated the Notice on Firmly Suppressing the Illegal Financing of Local Governments in the Name of Government Service Procurement (Cai Yu [2017] No. 87), in which the Ministry of Finance defines the scope of government service procurement by a positive list and a negative list, clarifies the direction of government service procurement reform, the scope of implementation, budget management, information disclosure and other issues, and strictly forbids local governments to borrow illegally in the name of government service procurement. Third, in addition to clarifying the scope covered by the policies, the Chinese government intensifies the efforts to investigate and handle the law-breaking activities of the local governments and keep the persons concerned accountable. In early January 2017, the Ministry of Finance sent letters to a number of local governments in Inner Mongolia Autonomous Region, Henan, Chongqing, Sichuan, as well as the Ministry of Commerce and China Banking Regulatory Commission, for the purposes of holding some county governments and municipal governments accountable for their provision of illegal financing guarantee and investigate and handle the individual enterprises and financial institutions for their illegal acts in accordance with the law. Remarkable results were achieved after this round of systematic and comprehensive overhaul. For example, the Audit Work Report of the State Council on the Implementation of the Central Budget and Other Fiscal Revenues and Expenditures for the Year of 2016 also pointed out that, by the end of March 2017, the overall local government debt risk is controllable in 14 counties, 16 cities, and 16 provinces audited by the National Audit Office.

In short, China has overcome numerous difficulties and challenges in the local government debt reform in recent years. The direction of reform is clear, the measures are effective, and the progress is impressive.

(Professor Zheng Chunrong, Associate Dean, Institute of Public Policy and Governance, Shanghai University of Finance and Economics)