China fully prepared for local gov't debt risks

By floating an emergency plan for local government debt risks Monday, China has addressed an issue that has made headlines for years.

The four-grade emergency plan, which could mean "fiscal re-balancing" on the part of local government, is a precautionary arrangement rather than an alarm for a crisis, said experts.

"We should make it clear that no crisis has ever occurred. The plan is more like a barrier against risk," said Zhao Quanhou, director of the financial research office of the Research Institute for Fiscal Science at the Ministry of Finance (MOF).

Data from the ministry showed total local government debt in China stood at 16 trillion yuan (about 2.35 trillion U.S. dollars) at the end of 2015 with a 38.9-percent debt-to-GDP ratio -- markedly lower than the 60-percent alert line of the European Union and other major economies.

With Grade I being the most serious, classification is based on the nature and impact of any incident, according to the State Council announcement.

City and county governments will fiscally re-balance if their annual interest payments on general debt are 10 percent higher than their public spending budgets, or if interest on special debts is 10 percent more than their government fund budgets.

"The fiscal rebalancing act is actually a rearrangement of government budgets. It is different from debt restructuring or a government bankruptcy plan," said Zhang Bin, a researcher with the Chinese Academy of Social Science (CASS).

According to the plan, once the local government launches fiscal rebalancing, it should take a slew of measures -- such as clearing up overdue taxes and owed fees, reducing expenditures and disposal of government assets -- to restore fiscal balance, guaranteed by the basic public service and effective operation of the government.

A senior official with the MOF said the precautionary arrangement is consistent with the nation's Budget Law and serves as a powerful measure to strengthen local government debt management.

Monday's announcement reaffirmed the central government will not become involved in bailouts and local government officials involved in graded incidents will be held accountable, even if they leave office.

While Chinese authorities have said the nation's debt risks are controllable, they still face challenges at the local level featuring illegal financing guarantees and fake public-private partnerships (PPPs).

By the end of 2015, the provinces of Zhejiang, Sichuan, Shandong and Henan had registered a total of 15.35 billion yuan in outstanding debt involving irregularities, according to latest statistics with the National Audit Office.

Local government debts soared during an investment and construction binge following the global financial crisis in 2008.

China has put a ceiling on the amount of local government debt. The total outstanding debt of the nation's local governments must be kept under 17.2 trillion yuan at the end of 2016, according to the central budget for 2016.

Risks will be eased by putting in place accountability mechanisms, said Bai Chongen, a Tsinghua University professor and member of the central bank monetary policy committee.

"The lifelong accountability system for officials will serve as a great deterrent against involvement in foul debts," said Zhang with CASS.

To rein in rising debt risks, China overhauled the management of government debts two years ago, streamlining fund-raising channels for local authorities and putting a cap on their annual bond issuance.

Government bonds are used to raise funds for urban infrastructure construction and public facilities. The nation is ramping up public spending to shore up the economy as private investment turned sluggish this year in fear of a continued slowdown.

A debt-for-bond swap program was introduced to convert outstanding debts. By the end of September, local governments had replaced 7.2 trillion yuan of debts under the program, according to the MOF.

The MOF said the debt level will remain stable for the remainder of the year and beyond thanks to growing fiscal incomes and GDP.

With its economic restructuring showing nascent progress, China's economy grew 6.7 percent in the third quarter, holding steady from the first two quarters of the year.