Legislator Admits Some Governments’ Unofficial Debt Exceeds Limit on Official Borrowing

Some local governments have borrowed more money off-the-books than the total legal amount the Ministry of Finance allows them to borrow through official channels, a senior lawmaker has said.

The Standing Committee of the National People’s Congress (NPC), China’s top legislature, surveyed of local governments’ “hidden debt” to confirm the exact extent of such borrowing, said Zhu Mingchun, a vice chairman of the committee’s Budgetary Affairs Commission.

Local governments’ off-the-books borrowing, or hidden debt, refers to liabilities they take via local government financing vehicles, public-private partnerships and government procurement contracts, and that they promise to pay back with fiscal revenues. Since the new budget law took effect in 2015, taking on such debt violates the rule that local governments can only raise money by issuing bonds.

Hidden debt is considered to be riskier than officially reported borrowing due to the lack of clarity.

“The size of some local governments’ hidden debt is rather big and the rate of increase is quite fast. The value of the hidden debt of some local governments has exceeded the legal quota of their official debt,” Zhu said at a press conference on Sunday. “The risks of some regions are quite outstanding.”

The results of the survey haven’t been finalized as some of the data still need to be verified, he said.

Curbing excessive borrowing by local governments, as well as by financial institutions, businesses and individuals, has been a key issue in China’s deleveraging campaign, which started in 2015.

To control hidden debt, the banking and insurance regulator has been working with the Ministry of Finance to establish a data system to monitor local government debt, including their off-the-book borrowing. Initial figures obtained by the authorities while preparing for the system showed the hidden debt of most provinces was 1.5 to 2 times larger than their reported budgets, people close to the regulators told Caixin previously.

As of December, outstanding official local government debt totaled 18.39 trillion yuan ($2.73 trillion), within a quota of 20.1 trillion yuan by the end of last year approved the NPC.

Last week, the Ministry of Finance proposed allowing local governments to issue 3.08 trillion yuan worth of bonds in 2019.

Contact reporter Liu Jiefei (jiefeiliu@caixin.com)