China: The Cat-and-Mouse Game in China’s Fights Against Debt Addiction – 5 Jun 2017

  • While top policymakers step up efforts to deleverage the economy and deflate asset bubbles, capital-thirsty local governments are embarking more on off-budget borrowing to continue their debt-fueled binge, undermining China’s years-long battle to contain the runaway growth of government debt.
  • Beijing’s stricter scrutiny hasn’t stopped local governments finding alternative ways to raise cash for local construction that don’t appear on their balance sheet. To get around tighter budget restrictions, local authorities and their financing vehicles have expanded borrowing and stepped up public-private partnership (PPP) projects, in which private investors and local governments work together to finance and develop infrastructure projects. They have issued debts for special investment funds and use of government procurement contracts to continue pumping cash from banks, mostly funds raised from retail investors via wealth management products, into investment projects, analysts said.
  • There are no official statistics on these off-budget debts, but some experts estimated that by the end of 2015, local governments’ hidden debt pile through off-budget borrowing methods reached CNY35tr. In 2015, the country’s parliament capped the total on-budget borrowing of local governments at CNY16tr.
  • According to the source, an inspection by the finance ministry in 2016 found some local governments using PPP arrangement, government procurement contracts and investment funds to raise capital and skirt rules on local borrowing. Some local authorities have offered implicit guarantees to local companies debts, violating related rules.
  • Concerns over the hidden debt overhang have spurred a series of regulatory moves since late 2016 to tighten oversight on local off-budget borrowing activities. On 2 Jun 17, the Ministry of Finance issued a document to bar local governments from using government procurement contracts to finance infrastructure and land development projects, a practice that largely fall outside regular oversight on local debt.

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