China’s Finance Ministry on Monday released a long list of amendments to the country’s budget law that included removing a 20-year ban on local and regional governments from issuing bonds.
The amendments, among many initiatives approved on Sunday by the standing committee of the National People’s Congress, represent a fundamentally different approach to a chronic problem in China — how to finance the building of roads, bridges, subways and other projects without letting local and regional governments pile up unsustainable levels of debt.
Since 1994, the national government had essentially banned local and regional leaders from issuing bonds and other forms of debt.
That ban reflected a longstanding worry that these governments, if given a chance, might borrow recklessly and later ask the national government to cover their debts if revenues proved inadequate.
However, local and regional governments have managed to borrow heavily anyway, notably by using state-owned enterprises under their control to do the borrowing instead, often setting up legal entities for the specific purpose of borrowing more money for infrastructure.
The result has been a surge in indirect borrowing by local and regional governments, which the National Audit Office estimated this summer as totaling US$2 trillion, or 21 percent of last year’s economic output for all of China.
Allowing these governments to start selling bonds and other debt could make it easier for the national government to track their indebtedness. Local and regional governments would require approval from the State Council, China’s Cabinet, to issue debt.
Chinese Finance Minister Lou Jiwei (樓繼偉) said at a news conference on Sunday that the new rules would “defuse financial risk.”
He also said that local and regional government debt appeared to have stopped growing in the past year.
According to Standard & Poor’s, these debts had been growing more than 20 percent a year from 2008 to last year, although from a very low base before the global financial crisis of 2008 and 2009.
The budget law revisions included a long list of other changes, such as requiring that local governments do more long-range financial planning and that they embrace accrual accounting, which involves recognizing revenues and expenses as they are incurred, instead of waiting for them to show up in cash transactions.
The debts accumulated by local and regional governments are in addition to a rapid, continuing buildup in corporate debt, particularly at state-owned enterprises with the political connections to borrow large sums from state-owned banks.
In China, overall credit as a share of economic output is approaching levels in the West, prompting some Western economists to worry that local and regional government debt might lead to a credit crisis.
Chinese officials are much more sanguine, saying that local and regional governments have many assets valued on their books at a tiny fraction of their current value, particularly given that land prices and building prices have increased many times over in the past decade.
Officials have given more attention lately to the real-estate sector, as home buyers, developers and builders rank among the largest categories of bank borrowers, and many companies also borrow heavily to invest in real estate.
The end to the ban on local and regional government borrowing received little immediate attention, even inside China, because it was overshadowed by a separate decision by the standing committee of the National People’s Congress to severely curtail a planned expansion in the ability of Hong Kong citizens to choose their next chief executive.