Caixin
Sep 15, 2018 07:50 PM

Dozens of Officials in Central China Punished for Illegal Debt Activity

Dozens of officials in central China’s Hunan province have been punished for illegal debt accumultion for their local government, the Ministry of Finance (MOF) has revealed.

The punishments come amid rising concern over the deteriorating finances of some areas in the province that have caused breakdowns in local government operations, including, in one case, the failure to pay civil servants’ salaries.

A total of 33 officials in Shaoyang city and two counties were given verbal reprimands, or were formally warned, punished with demerit points, or sacked from their posts for “taking on debt in violation of the law and regulations,” the ministry said in a statement (link in Chinese). Civil servants who received official warnings will be denied promotion for six months, while those with demerits will have their career advancement halted for up to 18 months, according to a rule (link in Chinese) adopted by the State Council, China’s cabinet, in 2007. Verbal reprimands could also result in similar consequences.

The penalties for the officials, many of them administrative leaders of their areas or heads of local government financing vehicles (LGFVs) – companies set up specifically to fund local government spending outside of the government’s budget – were meted out by the Hunan provincial government after their wrongdoing was uncovered by the ministry’s supervisory officials stationed in the region, the statement said. The MOF has supervisory offices in some key cities and all provincial-level regions except Tibet.

The ministry statement did not specify details of the officials’ misconduct or the projects for which the borrowed money was intended.

Cash crunches at some local governments in Hunan have made national news headlines in recent months, fueling concerns over their ability to pay off their debt, especially the borrowing of LGFVs, as the domestic economic growth has slowed.

Xiao Xiang, the head of the MOF’s supervisory office in Hunan, wrote in a commentary published last month in the China Financial and Economic News, which is run by the ministry, that the province’s government liabilities including LGFV debt doubled from the end of 2014 to early 2017. Xiao did not provide a figure on the total value of that debt.

The Leiyang city government in southern Hunan admitted in June that it was unable to pay May salaries to its employees as scheduled due to a serious shortage of funds in its coffers. The city has been struggling with economic recession, declining fiscal revenues and rising debt. Its fiscal revenues fell nearly 20% year on year in 2017 to 2.2 billion yuan ($320.4 million), while its outstanding government debt surged 162.5% from a year earlier to 13 billion yuan at the end of 2017, according to official figures. 

Also in June, officials in the northern Hunan city of Changde reportedly threatened to report information about alleged misconduct at local banks to Beijing’s anti-corruption watchdog if the lenders refused to offer discounted loans, refinance the debt of the city’s LGFVs or extend the repayment periods for the vehicles’ borrowinngs. The report triggered fears of rising default risks among the city’s LGFVs.

The financial strain on LGFVs has grown since the national government began a campaign against illegal local government borrowing that cut off many financing channels for these companies, raising the risk of defaults.

Local governments in 12 key cities and provincial-level regions have been named and shamed by the MOF for illegal borrowing activities since Qianjiang district in the southwestern metropolis of Chongqing became the first target of a broadside in early 2017. The MOF and other central government agencies have also stepped up scrutiny over accounting firms, financial institutions and law firms that help local governments with their illicit borrowing practices.

Minister of Finance Liu Kun vowed in a report (link in Chinese) to the country’s parliament late last month that the ministry would maintain the “strike-hard” approach to hold officials of local governments, state-owned enterprises, financial institutions and intermediary agencies “accountable for life” for any illegal actions involving local government borrowing.

Contact reporter Fran Wang (fangwang@caixin.com)

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