China hits brakes on urban rail projects to address debt

By Wang Cong Source:Global Times Published: 2018/7/16 21:03:39

Rules block hidden funding channels in move to address debt: experts


The eastern expansion of Beijing Subway Line 7 is being built on February 7. Photo: VCG



China has moved to rein in a boom in urban rail projects that propelled growth in sectors related to their construction but also drove up local government debt levels, which have become a priority for the central government's effort to defuse economic risks.

In the latest move, the State Council, China's cabinet, on Friday issued a guideline that substantially raised the bar for local rail projects and barred local governments from issuing too much debt through hidden channels for such projects.

While the country has been slashing infrastructure spending to curb soaring local government debt, the new measures further blocked loopholes that some local governments had taken advantage of in starting new rail projects, experts noted.

In the guideline, the State Council raised requirements in 12 areas such as population, public budget revenue, GDP and current debt level of cities applying for approval for new railway projects.

Most notably, the guideline requires that the GDP of the city reach at least 300 billion yuan ($44.88 billion) to be eligible for new rail projects. That is triple the previous level.

Such a level is aimed at disqualifying many Chinese cities that had been planning rail projects, according to Sun Zhang, a rail expert and professor at Shanghai Tongji University, who participated in drafting the guideline.

"Even with all of their great benefits, subways are not for every city. For one thing, they are very expensive to build and very expensive to run," Sun told the Global Times on Monday. "But some local governments only focus on the benefits and ignore the biggest challenges of starting a subway project: the government needs to put in money from initial construction to subsequent operations."

Sun said that rail projects have been long sought after by local officials who look to increase their "political achievements" and that construction of these projects does help local economies in various ways.

"However, under the current circumstances [involving local government debt], officials have to realize the real life-long cost of a subway project involves not just construction but also operations," he said.

The guideline also pointed out that some cities do not "fully assess" the real demand for subways or their resources for such facilities, which has "to a certain degree" added to local government debts.

To bar local governments from using hidden channels for raising debts to construct rail projects, the State Council guideline offered specific measures.

Under the guideline, local governments are prohibited from borrowing money through financing platform companies or under the guise of public-private partnerships, or PPPs, which the central government does encourage in certain areas.

"Although PPPs are a great way for raising funds for infrastructure projects if properly executed, in essence, they are a way of raising debt. For local governments that already face huge debt, it is a problem," said Liu Xuezhi, a senior macroeconomics expert at Bank of Communications.

The guideline also requires that fiscal funds account for at least 40 percent of the total investment in a rail project and it prohibits local governments from issuing debts for rail projects.

"This is a very specific and strict requirement that local governments could not get around, so it could prevent them from raising debt to fund rail projects that are not economically feasible," Liu said.


Newspaper headline: China hits brakes on urban rail projects


Posted in: ECONOMY,BIZ FOCUS

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