Opinion: The Need to Strengthen Legislative Oversight of Local Government Debt

The supervision of government debt by the National People’s Congress (NPC), China’s top legislature, is becoming increasingly institutionalized [para. 1]. On September 10, Minister of Finance Lan Foan presented the first-ever report on government debt management in 2023 to the NPC on behalf of the State Council, which set a precedent for future reporting. Concurrently, the NPC’s Budgetary Affairs and Financial and Economic Affairs Committees released their own research report on the previous year's government debt management [para. 2].

Previously, documents from the Communist Party of China Central Committee pushed for a system to report on government debt management, leading some regions to implement measures to strengthen local government debt supervision. This signals potential top-down changes aimed at enhancing legislative oversight of local government debt [para. 3]. The national debt-to-GDP ratio in 2023 was 56.1%, which analysts argue is not overly high compared to other economies, although substantial hidden debts remain a significant challenge [para. 4]. The rapid increase in government debt, compared to its overall size, also raises concerns, prompting proposals for a new debt management mechanism aligned with Beijing’s goal for high-quality development [para. 5].

The NPC possesses the authority to oversee government operations, including debt management. The Third Plenary Session of the Communist Party Central Committee stressed improvements in the debt management system, suggesting a comprehensive local debt monitoring and regulatory system, and a long-term mechanism for preventing hidden debt risks [para. 6]. Despite multiple rounds of rectification from the central government, which included the implementation of a new Budget Law in 2015 and the Document No. 43 milestone, local hidden debt remains a grave concern [para. 7]. Local governments continue to accrue debt through covert methods, making it a governance issue rather than solely a fiscal one, underscoring the necessity for stringent legislative oversight [para. 8].

The central government emphasizes a lifelong accountability system for local government borrowing and retroactive mechanisms to trace debt issues. There is a call for transparency and accountability, and several former local officials have been prosecuted for illegal borrowing, serving as a deterrent [para. 9][para. 10]. Current legislation focuses on budgetary law, and previous categorizations of "regulating government debt" as a third-tier legislative project indicated that conditions for more stringent legislation were not yet fully met [para. 10]. However, as the practice of debt management deepens, the legalization process is expected to accelerate [para. 11].

Market constraints and oversight by the NPC are seen as major forces to restrain local government debt. Nonetheless, there are inadequacies in market constraints, such as insufficient disclosure of project information and lack of rigorous financing reviews by some financial institutions [para. 12]. Certain local officials also allegedly pressure financial institutions, causing deviations from market-driven pricing [para. 13]. There is a consensus that resolving local government debt risks steadily over time requires clear delineation of duties and fiscal responsibilities between central and local governments and scientifically determining the size and structure of local government debt based on economic trends and regional conditions [para. 14].

Appropriate borrowing can benefit counter-cyclical adjustments, but the policy should not create an environment where local governments fear borrowing for development. The broader issue at play is balancing the boundaries between government and market [para. 15]. The journey of resolving government debt governance cannot be accomplished quickly; strengthening legislative oversight is crucial for preventing and resolving debt risks and modernizing governance capabilities and standards [para. 16].