China’s first lifelong accountability system to prevent local officials from accruing mountainous debt

By Huang Ge Source:Global Times Published: 2017/7/24 18:03:40


During the fifth National Financial Work Conference, held from July 14 to 15, China announced for the first time that a lifelong accountability system will be put in place to tackle local governments' debt issues. The measure demonstrates the importance of holding Chinese officials responsible for making bad debt-management decisions, even after their term in office ends. Experts say the new policy could help shift local governments' focus from the mere pursuit of GDP growth to wider concerns such as employment, social growth and environmental protection.

Local Chinese government officials will no longer be able to avoid bad debt-management decisions, even after their office term is completed.

From July 14 to 15, the National Financial Work Conference - which has been held every five years since 1997 to set the tone for future financial reforms - witnessed Chinese President Xi Jinping inform local governments that they are now obliged to establish an accurate list of achievements, strengthen control of debt increment and adhere to a lifelong accountability system.

What is significant and progressive about this new measure is that former local officials no longer in office will be held accountable for life for their bad economic growth decisions that result in debt.

China's efforts to ramp up debt increment control and to roll out preventative measures to curb local governments' financial risk taking, however, will invite unwelcome obstacles along the way, especially regarding the sustainability of the crackdown, experts warn.

Timely resolution

This is the first time China has launched a lifelong accountability system designed to curb government borrowing, which shows the country's determination to further tackle the expansion of local government's secret debts, experts say.

It is necessary to put forward such a system in order to remind local officials of their responsibilities, and as a result, this would help to prevent mounting debts caused by reckless financial pursuits, said Lian Ping, chief economist at Bank of Communications.

Local governments are expected to learn to live within reasonable spending limits. A lifelong accountability system could make local officials more cautious when making debt-management decisions, Lian told the Global Times Thursday, noting that under the system, certain upper-level institutions are expected to implement the accountability measures.

Nongovernmental organizations could assist with supervision and scrutiny and ''local residents could also monitor officials through an online point-based evaluation system," Lian suggested.

In order to carry out this process effectively, a rewards and punishments mechanism should also be integrated into the policy, Lian noted.

For instance, if a local government is heavily in debt, the official responsible should be prohibited from being promoted and should be brought down to a lower level position with less responsibility, he said.

China has already implemented many restrictive measures to tackle local debts, such as regulating local financing platforms and encouraging governments to issue bonds, but problems still persist. The lifelong accountability system is therefore crucial to strengthening the crackdown.

"The system came in time, and its prospect will be sound," Lian said.

Zhuang Jian, an Asian Development Bank macroeconomist, told the Global Times Thursday that "due to the launch of the lifelong accountability system, changes have taken place in the assessment of local officials' achievements."

Also, instead of focusing on GDP growth rates as the mere factor for driving sustainable development, other contributing factors are now being taken into consideration, such as employment, social development, medical care, environment quality and clean energy development, said Zhuang.

The new evaluation standards would mitigate local governments' debt development modes that largely depend on loans, he noted, warning that the transformation would take some time.

Debt figures and risks

At the end of 2016, the combined debt of central and local governments in China stood at 27.33 trillion yuan ($3.96 trillion), with the debt-to-GDP ratio standing at around 36.7 percent, the Xinhua News Agency reported, citing Chinese Finance Minister Xiao Jie from March.

But Xiao said that there ''won't be big changes'' in the ratio this year.

Debt of local governments reached 15.32 trillion yuan in 2016 and the local debt-to-GDP ratio was 80.5 percent, said the Ministry of Finance.

The local debt ratio has surpassed the average international level, which is set at around 60 percent, according to experts' estimates.

Experts believe that local debt problems boosted risks during China's economic development.

Over the past years, local governments' debts predominantly manifested in new and relatively covert forms, particularly in Public-Private-Partnership (PPP) projects, Hu Yifan, chief China economist with UBS Wealth Management, told the Global Times.

Hu said that by the end of the first quarter, the approved PPP projects in China were worth 20 trillion yuan, and among them, 4 trillion yuan worth of projects had already been carried out.

"About 75 percent of the investment came from governments … and private capital only accounted for between 5 percent and 10 percent. Thus, this is a prime example of the way hidden debt builds up for local governments," Hu said.

Hu said that if the central government is determined to tighten control on local governments' debts in the second half of this year, the rising momentum of infrastructure investment driven by PPP projects would slow down.

"Strict regulations on local debts would result in unfinished projects as well as the postponement of some. In return, this would bring some downturn pressure to the country's economic growth in the second half of this year," he predicted.

Under the new accountability system, local governments are expected to better manage future PPP projects and are advised to shift their focus from the quantity to the quality of these projects.

Future measures

Relevant authorities should continue to strictly regulate local governments' financing activities as it would play a key role in curbing risks caused by reckless government borrowing, said Zeng Gang, director of banking research at the Institute of Finance and Banking under the Chinese Academy of Social Sciences.

The history and development of local governments' debts are linked not only to reckless behaviors, but also to limited local fundraising channels, Zeng told the Global Times on Thursday.

He said that improving and strengthening the channels that issue local bonds would enhance local governments' fundraising as well as minimize their debt risks.

The central government should also restrict the excessively rapid expansion of secret debts of local governments by promoting transparency and ensuring the debt is detectable and visible through methods such as boosting bond markets and encouraging local institutions and State-owned enterprises to issue bonds, suggested Zeng.

Local governments could include debts into budget plans, a move that would help guarantee their repaying capabilities in a medium and long term, according to Zeng.

Newspaper headline: No more impunity

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