Do not capitalize on China's local government debt (2)

14:22, July 22, 2011      

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However, as China's existing budget law formulates that local governments are not allowed to issue municipal bonds, the huge funding gap formed by the local construction needs to be solved by local financing platforms. Particularly, after the international financial crisis, the Chinese government invested 4 trillion yuan to launch the economic stimulus plan and the expansionary fiscal policy to promote the rapid development and expansion of local financing platform loans, which is the main part of local debt.

In addition, various places are currently making major efforts to accelerate the affordable housing construction, which will certainly bring new pressure to local financing.

Guo believes although construction of affordable housing will certainly increase local debt, as affordable houses are available to be rented and sold, it can ensure normal cash flow and will not endanger the solvency of local governments. Meanwhile, as the affordable housing construction is a livelihood project, even if there are problems in local debt, the Chinese government will use state revenue as local debt subsidies through financing.

"The local debt risk is just like the two sides of the coin. Creditors have to face financial and credit risk, while local governments have to face the risk of insolvency," Guo said.

Guo also believes although total debt is expanding and the funds of specific projects are lacking, local governments are still capable of paying debt. Therefore, the local debt risk is controllable on the whole.

Central government strengthens supervision on local debts

In 2011, the central bank adopted a relatively tight monetary policy and is more vigilant about the risks of bank credits and local debts. Meanwhile, it will strengthen the supervision on local debts and make local financing platforms play more effective roles.

Wei Jianing, deputy secretary of the Macroeconomic Research Department under the Development Research Center of the State Council, believes that promoting structural reform and thoroughly clearing up the relations between local and central governments are the fundamental things means of solving the local debt issue. The central government should consider supervising local finance its primary job. And regarding the decision-making mechanism, the central government should also establish a special "department of local affairs" which will play the role of "spokesman for the local government" and indicate whether the local financial situation could reach the standard set by the central government. Meanwhile, it is also responsible of supervising the public finance and the debt burden of the local government.

"Fixing the sources and channels of local incomes to a certain extent is the key for solving the local debt issue." Professor Zhou said that the fixed incomes should be connected with the future debts so that debts could be paid according to incomes. If the incomes are not fixed and no appointed means of paying debt exist, the cash flow will be risky even if a government is capable of paying its debts. In other words, the future incomes and future debt payments should be matched. If the budgetary incomes are certain, the debt risks will be settled.

Guo also said that settling the risks of local governments' financing platforms cannot be accomplished in one stroke, but will need a long and step-by-step process. In addition to guaranteeing the food and clothing of the common people, governmental incomes should also be invested in projects for the people's livelihood, such as affordable housing. For the commercial projects with large cash flows and investments that could be recovered soon, local governments should focus on doing the biding job and leave the projects to private capitals. In the future, as long as governments could clearly understand their duties, the local debt issue will be solved easily.

By Zhou Xiaoyuan from People's Daily Overseas Edition, translated by People's Daily Online
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