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Hold local governments accountable for their debt, Chinese president says

by July 17, 2017 General

Chinese President Xi Jinping has told top mainland officials they must tighten control over borrowing by local officials and hold them permanently accountable for the debt they incur.

But one expert said Beijing still had enough room to reshuffle debt between the central and local authorities.

Xi presided over the National Financial Work Conference, held every five years and which ended on Saturday. He told officials better supervision of local borrowing was needed and cadres should remain on the hook for their debt. No further details were given of how such increased accountability would work.

China sets up super regulator to mend over fragmented financial regulatory structure. According to official figures, China’s overall government debt was about 27.3 trillion yuan (US$4.03 trillion or HK$31.45 trillion) at the end of last year, almost 40 per cent of its gross domestic product. This is still lower than many developed economies such as the United States, where government debt exceeds 90 per cent of GDP. But unregulated corporate loans guaranteed by local governments could push the level above 60 per cent of China’s GDP, economists estimate.

In theory, local governments can only borrow through bond issuances, at levels set by the central government. Every year, the National People’s Congress sets a ceiling for overall debt and distributes tranches to each province. This year, the level was raised by 1.63 trillion yuan, taking the cumulative debt to 18.8 trillion yuan. Facing pressure to meet growth targets and with limited ways to bolster revenues, officials turn to state-owned companies or local government financing vehicles to raise capital.

By continuing to tap these sources for financing, they push up the cost of borrowing, an official from the Ministry of Finance was quoted as saying by People’s Daily on Monday. “It’s like driving a big truck. No overloading means more safety,” the official said.

Rating agency Moody’s downgraded China’s sovereign debt rating by one notch in May, concerned that the country’s debt-fuelled growth is embedded with financial risks and its reform wasn’t sufficient to control its risking burden of borrowing. According to Moody’s, the nation’s overall debt exceeds 250 per cent of GDP.

Larry Hu, an analyst at Macquarie Group, said Beijing still had ways to deal with the problem – for instance, it could transfer local debt to the central government. “[But] the rising debt is a severe issue as it reflects large scale capital misallocation between the private and the public sectors, which would lower productivity and cause China to fall into a middle-income trap,” Hu wrote in a note.

Zhou Hao, senior emerging market economist at Commerzbank in Singapore, said imposing a permanent responsibility on local officials for their debt problem was, at most, small progress, but wouldn’t affect how they made their decisions to compete for GDP growth.

“Without beautiful economic numbers, they still won’t be able to get promoted,” Zhou said.