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China: Finance Ministry Focuses on Local Government Debt |
| Source: |
China Daily |
| Source Date: |
Thursday, July 28, 2011 |
| Focus: |
ICT for MDGs
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| Country: |
China |
| Created: |
Aug 02, 2011 |
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$0The
Ministry of Finance has vowed to strengthen the management and monitoring of
local government debt, and a mechanism for debt financing is under
consideration to help prevent a potential default. $0
$0 $0
$0The
ministry identified management of the debt as one of its priorities for the
remainder of 2011, according to a statement on its website. $0
$0 $0
$0Economists
said that better monitoring of the debt shows the government's determination to
supervise and handle it. $0
$0 $0
$0Jia
Kang, director of the Research Institute for Fiscal Science under the ministry,
insisted that China's public debt is still in the "safe zone"
considering the country's huge GDP of nearly 40 trillion yuan ($6.2 trillion). $0
$0 $0
$0The
National Audit Office said in late June that the debt of local governments -
provincial, prefecture and county - by the end of 2010 stood at 10.7 trillion
yuan, a figure that exceeded the year's revenue of 8.3 trillion yuan. $0
$0 $0
$0A total
of 46.4 percent, almost 5 trillion yuan, was raised from local government
financing platform companies. These are financing vehicles set up by local
authorities. $0
$0 $0
$0Of the
6,576 companies audited, approximately 20 percent were found to have defects in
management, involving 244 billion yuan. $0
$0 $0
$0Concerns
were raised that debt default would result in these platform companies facing
capital shortfalls. A default would also increase bad debts for banks and see
projects delayed or abandoned. $0
$0 $0
$0The
Ministry of Finance said on its website that it will "properly handle debt
payment and the follow-up financing of projects under construction, and
continue to clean up and regulate financing platforms. $0
$0 $0
$0"Meanwhile,
a sound system of debt information, as well as a regular reporting mechanism on
the statistics, should be established to implement dynamic monitoring over
local government debt." $0
$0 $0
$0Jia
said the central and local governments are working together on the details. $0
$0 $0
$0Zhuang
Jian, a senior economist with the Asian Development Bank, said it is not too
late to act on local government debt, although it would have been better if
action had been taken two or three years ago. $0
$0 $0
$0"Although
local governments may experience problems in raising money, it is good for the
overall health of the economy in the long term," he said. $0
$0 $0
$0Chen
Chenzhao, deputy director of the audit office's local government debt team,
told Xinhua News Agency last month that, in general terms, local government
debt has not yet exceeded the ability to manage it. $0
$0 $0
$0According
to the Ministry of Finance, total fiscal revenue in the first six months was
5.68 trillion yuan, representing an annual growth of 31.2 percent. $0
$0 $0
$0The
audit office's report suggested that more than 20 percent of prefecture
governments are facing a debt ratio higher than 100 percent. $0
$0 $0
$0Meanwhile,
local governments have provided irregular warranties for 46.4 billion yuan of
debt. $0
$0 $0
$0Ma
Guangyuan, an economist with the Chinese Academy of Social Sciences, said that
to eliminate debt risk, the tax system must be reformed to reduce reliance on
land sales. $0
$0 $0
$0Qu
Hongbin, China chief economist and co-head of Asian economics research at HSBC,
said while the debt, of which about 80 percent is in bank loans, poses a
potential risk to China's banking system, Beijing can and will act to tackle
the risk of nonperforming bank loans in the coming years. $0
$0 $0
$0"Money
borrowed by local governments mostly goes to investments. So the local
governments' assets increase along with their debt," Qu said. $0
$0 $0
$0"The
problem is a lack of transparency, and a mismatch between the maturity of these
debts and the long payback period of the projects that they have been invested
in." $0
$0 $0
$0The
Ministry of Finance will have a bond issue of 46.6 billion yuan in August. The
issue, on behalf of local governments, will be made up of two parts, 22.6
billion yuan for three years and 22 billion yuan for five years. $0
$0 $0
$0It is
the second issue of the year but its success is far from certain after the
first round in July failed to excite much investor interest. $0
$0 $0
$0Stephen
Green, an economist with Standard Chartered Plc, wrote in a research note that
local government loans mostly have terms of 3-5 years. And the pressure for
repaying the principal has not yet hit, but it will begin in 2012 to 2013, he
said. $0
$0 $0
$0One way
to restructure the debt is for local governments to issue bonds with a longer
maturity period to replace short-term loans, Qu said. This will boost
transparency as bonds, which are sold openly in the market, have a greater
degree of disclosure to entice investors.$0
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