China’s local governments told to ‘clean up’ debt financing

Local government debt is once again coming under scrutiny from China’s authorities, with regional governments being told to “clean up” financing guarantee arrangements that are “out of place”, according to a report by the 21st Century Business Herald on Wednesday.

The governments have until the end of July to do so, the report said, citing a source involved in local government financing.

Local government debt has been a longstanding issue in China. It soared during a stimulus spending binge following the global financial crisis in 2008.

As recently as Monday, a top level meeting of the Communist Party’s Politburo, involving President Xi Jinping, emphasized the need to “urgently tackle the risks” from local government debt.

“The central government wants to control the overall debt level to a manageable level, and local government debt is one of the key areas to do so”

Earlier, on July 15, a closed door gathering of the country’s top financial regulators also emphasized how regional governments will be subjected to tougher supervision, according to the 21st Century Business Herald report. The newspaper said the increased focus on local government debt is part of the central government’s drive to control risks within the financial system, and to control the use of capital by local government.

“The central government wants to control the overall debt level to a manageable level, and local government debt is one of the key areas to do so,” Liu Yuanchun, a Renmin University professor told the paper.

Authorities ramped up controls on local government debt issuance and financing in May, when it was forbidden to inject further public funds into local government financing vehicles – the financing instruments long used to circumvent budgetary controls imposed by the central government in financing infrastructure projects.

The issue is all the more pressing ahead of China’s anticipated leadership shuffle later this year, as the prospects of provincial party members seeking promotions are usually related to the economic performance of their areas.

However, as the central government cracks down on local government debts, the latter may seek ways around the situation. “Issuance of bonds on land reserves and public-private partnerships are some ways used,” an unnamed regional-level provincial government finance head told the 21st Century Business Herald. “As one door is closed, another opens.”