Managing local governments' debt risks

The regulations on the implementation of the Budget Law, which was recently published by the State Council and comes into effect on Oct 1, makes specific provisions on the management of local government debts, which will meet the need for the standardized management of local government debts after the amendment to the budget law and provide institutional support for the prevention of local government debt risks.

Given that local governments had no power to issue debts and the old budget law made no specific provisions, it is timely and also necessary for the newly-published regulations to make such provisions to plug possible loopholes.

Local government debt risks must be prevented from rising beyond a certain point. This is necessary to implement the quota management of local government debts. The determination of local government debt quotas needs to take into account various factors, including local debt risks and their financial conditions, and national macro-control policies. The upper ceiling set for local government debts must not be breached.

To realize better quota management of local government debts, the nature of the debt should be clearly defined. First, both general debts and special debts belong to local government debts. Second, the loans from foreign governments and international organizations, as long as local governments are solvent enough to repay, should all be defined as local general debts.

General debts and special debts are raised for different purposes, but as government debts, both are used for the development of public welfare undertakings, and the difference is that the funds raised as special debts are used for those profitable public welfare undertakings. However, there are big differences between the two in terms of management, given that the funds raised as special debts usually need to be repaid by the incomes from the involved project, and if the project fails to gain expected revenues, the debt risks may arise.

Hierarchical management is so far adopted for local government debts. The provincial-level financial departments are authorized to undertake overall responsibility for unified debt quota management. From the perspective of activating the enthusiasms of local governments, lower-level governments should be granted more independent powers for debt issuance as one of the directions for future local debt reforms.

However, considering grassroots financial management is still relatively weak, it is a pragmatic choice for provincial-level financial authorities to conduct unified quota management for local government debts, because this is an effective means to prevent local debt risks.

The Ministry of Finance and provincial-level financial authorities act as the main watchdog against local government debt risks. However, given that risk management of local government debts is based on risk assessment, local governments at all levels should also assume important responsibilities, such as providing early warning and taking measures to supervise and defuse debt risks when necessary.