China Issues New Plan for Supervising Local Government Finances

(Beijing) – In an effort to tame excessive financial leverage and bolster risk controls, China is setting up new system for supervising local government finances and debt issuance, according to a new policy document issued Wednesday.

A cross-department supervisory mechanism will monitor local governments’ spending and debt to prevent systemic financial risks, according to the document. The policy statement was jointly issued by six government agencies including the Ministry of Finance, the Development and Reform Commission, the Central Bank and securities and banking regulators.

Chinese authorities have taken a series of steps to manage surging debt as local governments borrowed heavily to fund economic development and infrastructure projects. By the end of 2016, outstanding local government debt totaled 15.32 trillion yuan ($2.22 trillion), or more than 80% of the local governments’ total revenue, according to the MOF.

Although Vice Finance Minister Liu Wei declared in late March that the debt risks “are very much under control,” analysts warned that off-budget financing activities have revived since a new budget law took effect last year. To get around tighter budget restrictions, local authorities have expanded borrowing and stepped up public-private partnership arrangements, issuing debts for special investment funds and use of government service procurement contracts to expand leverage.

In January, the MOF partnered with other central government agencies to audit local debt in several provinces. The regulators imposed punishment on several local government vehicles and financial institutions in Shandong, Jiansu and other regions for violations.

The new, six-agency policy is intended to address local debt issues by tightening control of local authorities’ spending and financial institutions’ lending to local governments, said Zheng Chunrong, a public policy expert at the Shanghai University of Finance and Economics. The plan involves closer cooperation among fiscal and financial regulators, he said.

Under the policy directive, local governments will be barred from using borrowed money to set up investment funds, from issuing excessive debt through PPP projects, and from offering any implicit guarantee to their financing vehicles.

The document also ordered local governments to set up debt management teams to audit all local debts and correct all irregularities by July 31.

Government agencies will collaborate with industrial associations such as the Chinese Institute of Certified Public Accountants, China Appraisal Society and All China Lawyers Association to jointly supervise local governments, financing vehicles and financial institutions involved in local debt issuance. The collaborating groups and agencies will impose punishment for misconduct.

Contact reporter Han Wei (weihan@caixin.com)