Council Releases Rules to Strengthen Supervision and Debt Management
The country’s State Council recently published rules that will strengthen the supervision and management of debts that is incurred by the local governments. This is a first document released by the State Council that is aim in managing and control the risks that is posed by trillions of yuan in debts by the local government.
The results that indicates risks from these government debts are generally controlled, but there are some risks and problems that is related to borrowing and management the fund uses needs to be addressed. The State Council is requiring the establishment of an integrate management system for the control of these debts that will also cover borrowing fund use and repayment.
Last year the total debts incurred by the local government has reached 10.88 trillion yuan and these debts are guaranteed by the local government at various levels which amounted to 2.66 trillion yuan and contingent liabilities stands at 4.34 trillion yuan.
The State Council said a month after the National People’s Congress along with the Chinese parliament passed the much awaited set of amendments to the country’s budget law in which revisions marked several important milestones in the fiscal reforms and gave way to local government to formally issue bonds in the bond market. The old law banned local governments from issuing bonds, but sought back doors to raise funds by getting loans from banks and issuing bonds via locally government funded vehicles which are left unsupervised.
The money that is raised through municipal bonds can be used to fund public services and needs to pay existing debt, but not the government operations. The debts that arise from bond issuance should be included in the local government budget. The State Council will then create a system that assess local government debt risk and will establish mechanisms for an early warning emergency response and accountability.