Caixin
Dec 25, 2017 07:25 PM
ECONOMY

Central Authority Vows No Bailouts for Illicit Loans

As of the end of 2016, regional and local governments had 15.32 trillion yuan ($2.3 trillion) in total debt, according to data from the Ministry of Finance. Meanwhile, the central government’s debt balance was 12.01 trillion yuan. Photo: Visual China
As of the end of 2016, regional and local governments had 15.32 trillion yuan ($2.3 trillion) in total debt, according to data from the Ministry of Finance. Meanwhile, the central government’s debt balance was 12.01 trillion yuan. Photo: Visual China

The central government will not secure irregular loans taken out by local and regional governments as it seeks to curtail runway growth in off-balance sheet debt, the Ministry of Finance said.

At the conclusion of the Central Economic Work Conference on Wednesday, Chinese authorities said preventing financial risks will be one of three critical battles going forward, according to a report by the official Xinhua News Agency.

“Because high leverage is the source of financial risk, cutting excessive leverage is at the top of the agenda,” said Li Yang, a member of the Chinese Academy of Social Sciences (CASS), a top government-affiliated think tank.

To prevent financial risks, the government needs to focus on trimming excessive leverage at China’s stated-owned enterprises and at regional and local governments, Li said at a forum on Saturday. In the next three years, stepped-up regulations will take aim at hidden debt risks from regional and local governments.

In a report published over the weekend, the ministry also touched on hidden debt risks. Some funds raised by regional and local governments through channels such as public-private partnerships, government procurement services and investment funds have increased the debt risks for regional and local governments, though the report said overall risk remains manageable.

The main culprit for the soaring debt is the incorrect view of political performance among some local cadres, the ministry said. When seeking “political achievements,” some local governments have engaged in excessive borrowing to support ambitious expansion plans, straining their financial resources, it said.

Some financial institutions were also responsible for providing irregular financing for projects connected to local governments without properly evaluating the risks of the projects, the ministry said.

To curb “disordered borrowing” and “growth in hidden debts,” the ministry said it will ask local and regional governments to avoid unnecessary construction projects and rein in projects whose spending has gotten out of hand.

It also said the banks should not finance projects that are either unsecured by lawful collateral or that can’t generate the stable cash flow needed for repayment. It also warned state-owned enterprises against helping local and regional governments circumvent regulations to get loans.

For the outstanding hidden debts, the ministry made clear that the central government will not bail out regional and local governments. In addition, loans extended by financial institutions to projects connected with local and regional governments cannot be guaranteed by local and regional government coffers.

The ministry also encouraged the creation of a market-orientated debt default management system.

The ministry also said it will deal with any misconduct at government investment funds, public-private-partnership projects and government procurement services, which regional and local governments used as alternative financing channels after the authorities began to restrict traditional channels such as banks and local government financing vehicles.

The ministry has promised to allocate higher quotas for legitimate borrowing by regional and local governments, though it stipulated that they should use the money primarily for infrastructure projects in impoverished regions.

As of the end of 2016, regional and local governments had 15.32 trillion yuan ($2.3 trillion) in total debt, according to data from the Ministry of Finance. Meanwhile, the central government’s debt balance was 12.01 trillion yuan.

Combined government debt totaled 27.33 trillion yuan, or about 36.7% of China’s GDP. The figured was still below the warning level of 100% to 120% set by international institutions.

However, the real overall debt levels of the regional and local government are hard to estimate, as they also include off-balance sheet opaque regional and local government irregular borrowing as well.

Contact reporter Pan Che (chepan@caixin.com)

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