Local govt spending cap an important step forward

By Hu Weijia Source:Global Times Published: 2015-8-31 0:33:01

More efforts needed to boost debt-repayment capabilities


China's top legislature over the weekend approved a resolution for local government debt, imposing a debt ceiling of 16 trillion yuan ($2.5 trillion) for 2015.

Adopting a debt ceiling is an important step in hedging against potential financial risks at a time when some local governments are planning to spur the slowing economy with further infrastructure spending, but the move alone will not be enough to rein in local government debt. Compared with restricting borrowing, boosting local governments' debt-repayment capability is more important.

According to the Xinhua News Agency, the 16-trillion-yuan debt ceiling could be split up, with 15.4 trillion yuan covering local government debt outstanding as of the end of 2014, and 0.6 trillion yuan for the maximum amount of new debt local governments can run up in 2015.

Local governments used to borrow money by setting up companies known as local government financing vehicles (LGFVs), after the central government banned them from raising money through bond sales in 1994. But in case of default by the LGFVs, the overall financial system could feel the impact. So, because of the fast-growing debts and potential financial risk, local governments have been prohibited from using LGFVs for financing new projects since 2014.

Global markets have paid close attention to the health of the Chinese financial system in the past few weeks, following a devaluation of the yuan and the slump in China's stock markets. The move to adopt a debt ceiling is expected to improve the local financial structure and reduce overall financial risk.

But the debt ceiling also raises a new question for the Chinese economy: Will 0.6 trillion in new local government debt be enough to spur investment and maintain growth of around 7 percent for the Chinese economy?

Under the new rule, efforts in several fields will be needed.

First, local governments' debt-repayment capability needs to be improved.

Inefficient investment and bad debt risks need to be closely monitored, and projects financed by local governments, apart from public service projects, should be carefully controlled in order to ensure stable revenue.

Second, local governments need to speed up their progress in promoting the public-private partnership (PPP) model to introduce more private capital into infrastructure and public sector projects. The PPP model, under which both governments and private firms share investment and profits, is an important way to ease the financing difficulties facing local governments, but sadly, only a small proportion of the proposed PPP projects have been finalized so far. Local governments should offer more projects, especially easier ones that private investors know how to handle, and offer a stable and sustainable policy for the long term.

Local governments also need to continue their efforts to transition away from an economic model based on debt-fuelled investment projects and to make consumer spending the driving force for economic growth.

The author is a reporter with the Global Times. bizopinion@globaltimes.com.cn

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