Jul 24, 2018 07:27 PM

Economists Urge Beijing Not to Tolerate Implicit Guarantees

A high-speed railway is shown under construction in Pingdu village, Shandong province, on Feb. 5. Photo: IC
A high-speed railway is shown under construction in Pingdu village, Shandong province, on Feb. 5. Photo: IC

Economists have urged Beijing not to loosen its grip on implicit local government borrowing guarantees as provincial-level regions are expected to accelerate bond issuance in the coming months.

The call comes at a time when slowing infrastructure investment has dragged down the growth of fixed-asset investment, a key driver of the country’s economy. Analysts attribute the slowdown of the government-driven sector to Beijing’s tighter controls on local government borrowing, particularly off-the-books debt supported by implicit government guarantees.

The central government should continue to push local authorities to eliminate their implicit guarantees on loans owed by local government financing vehicles (LGFVs), Zhu Baoliang, chief economist at the government-backed State Information Center, told Caixin.

Analysts said that there is ample room for local governments to ramp up their explicit debt levels as their bond issuance was quite slow in recent months.

Local governments issued 1.41 trillion yuan ($208.0 billion) in bonds in the first half of the year, nearly a quarter less than in the same period last year, according to data from the Ministry of Finance.

Of the total amount of the new bonds issued in the first half, two-thirds swapped debt into bonds, 9.5% refinanced existing debt, and only 23.6%, or 332.87 billion yuan, was new debt taken on by local governments.

The net increase of local government bonds in the first half accounts for only 15.3% of this year’s quota set by the country’s legislature, according to Caixin’s calculations based on government data.

Local officials have become quite cautious amid concerns over being held personally accountable for illegal borrowing. Some local governments have suspended new infrastructure projects, while others have used money raised from new bond issues to repay LGFV debt to avoid default, Zhao Quanhou, head of the finance research center at the Chinese Academy of Fiscal Sciences, told Caixin.

The problem is that local governments don’t fully understand the logic behind Beijing’s policies, he said. It’s urgent that they correctly understand the balance between risk prevention and project investment, he added.

Commercial banks have also become cautious in lending to LGFVs, so much so that Beijing on Monday urged local governments to use money in their coffers to supplement financial institutions’ lending to meet legitimate LGFV financing needs and avoid the shutdown of unfinished projects due to lack of funding.

Contact Reporter Lin Jinbing (

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