The State Council has released a contingency plan for managing the mountain of local government debt, saying the central government will stick to the principle of “no bailouts”.
Analysts said the plan was the latest official attempt to dispel suggestions that Beijing would shoulder responsibility for local government debt, which some economists say risks undermining the country’s financial and social stability.
County or city-level governments should take care of their own debts and provincial governments should step in if lower-level administrations fail to do so, according to the plan posted on the central government website.
The guidelines, specifying for the first time four types of “debt risk” and corresponding emergency responses, sent “clearer warning signals” to local governments that they must consider how to repay debts before borrowing, Xinhua said in a commentary on Monday.
The worst-case scenario includes provincial governments failing to make principal or interest payments on bonds.
Administrations at the county level and above must set up a designated office to handle debt deploy fiscal remedies, including suspending tax credits, selling assets and cutting expenditure when emergencies arise, the State Council said.
It said the rules were part of efforts to resolve monetary and fiscal risks and to maintain economic and social stability.
Raymond Yeung, chief economist for greater China at ANZ Bank, said creditors of future local government bonds might demand higher returns due to the added risks.
“We expect higher charges on new local government debt to be issued in the future to better reflect higher risks with no central government guarantee,” Yeung said.
Yeung said deeper fiscal reforms, such as better management of local government revenue, were still urgently needed.
Local government reliance on income from land sales has long been blamed as one driver of ballooning asset bubbles, as they are the final beneficiaries of higher housing prices.
Progress on tackling the mountain of local governmentdebt is one of the main legacies of former finance minister Lou Jiwei, who stepped down earlier this month.
Article source: http://www.scmp.com/news/china/economy/article/2045878/no-bailouts-chinas-plan-tackle-local-government-debt-pile