Caixin
Nov 04, 2016 05:51 PM
POLITICS & LAW

Beijing Steps Up Crackdown on Illegal Government Fundraising

China will crack down on local officials who use their positions to guarantee loans to state-run enterprises (SOEs), extending a nearly 2-year-old campaign to stamp out illegal local government fundraising, the Ministry of Finance said on Friday.

The ministry announced its latest crackdown on its website after conducting a survey last month to determine whether local governments were collecting money by methods other than issuing bonds — the only legal fundraising method since last year.

China worries that local governments are using a wide range of channels to raise revenue, putting them at risk if they accumulate too much debt that can't be repaid. Those governments previously relied mostly on land sales and some taxes, and are gradually being allowed to issue bonds to give them more options.

But some have resorted to steps such as establishing third-party fundraising firms to expand their revenue, allowing them to keep such debt off their balance sheets.

In the latest step of its crackdown on such practices, the Finance Ministry said it will target local governments that have repaid or guaranteed any loans for SOEs, which often have close ties with local officials. It has already sent inspectors to look for such illegal behavior, it added.

China's debt ratio is relatively high compared with its emerging-market peers. As of March, government debt was equal to 45.2% of the nation's gross domestic product, higher than the average level for other emerging markets, according to the most recent figures from the Bank for International Settlements.

Beijing is making efforts to ease debt pressure and stabilize the economy, which has relied heavily on large-scaled government-backed infrastructure projects and an overheated property market for growth in recent years.

China's manufacturing purchasing managers index, a key manufacturing indicator, rose to 2-year high of 51.2 in October, as continued heavy spending on infrastructure boosted the sector.

In order to support the economy, governments have turned to public-private partnerships that can ease their own debt pressure while also boosting slumping private investment. But most of those partnerships have been funded by giant state-supported SOEs rather than the true private sector, said Liu Liu, economist at China International Capital Corp.

Contact reporter Coco Feng (renkefeng@caixin.com); editor Doug Young (dougyoung@caixin.com)

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