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The key to Preventing Local Debt Risks Lies in the Transformation of Government Functions



By Li Zuojun

From February to June 2016, the issuance of local government bond had exceeded 3.61 trillion yuan, close to the aggregate sum of last year. By the end of June 2016, the local governments’ bond depository balance had reached 8.3 trillion yuan, close to 80% of the maximum limit of general debt balance defined by the central and local budget plan. Behind the increased issuance of local government bonds is the growing pressure resulting from the enlarged gap between revenue and expenditure for local governments. The reasons are as follows.

1. The risks of large-scale local government debts are manifested mainly in two aspects: First, the debt itself is risky. If the debts are not paid back in time with interest, debt default will occur. Second, the risk of liability transmission should also be considered. Most local government debts are financed through banks, trust companies and other financial institutions. If a large scale of debt default takes place, it will lead to financial risks. However, if local government debts are replaced by central debts through bond-for-debt swap, the central bank will be forced to print more money, which may cause the risk of currency devaluation. Debt risks may also affect the smooth operation of local governments and the high quality of public services, which can easily touch off social problems.

2. The lack of information transparency in local government bonds should also be addressed. Local governments need to achieve the highest possible information transparency relating to the issue of local government bonds and accept social supervision, and advance the systems for giving early warning against risks as well as related prevention and control measures. If illegal activities are found during the local bond financing, those who are involved should be punished by law in time. At present, the relevant departments are quite aware of this problem, so the Ministry of Finance requires that local government bond balance, replacement bonds, and bond increment should all be subject to quota management, and that local governments should disclose financial and debt information and control the issuance sequence.

3. Radical changes need to be made to completely remove the risks of local government debts. First, government functions need to be transformed so that local governments no longer play the role of enterprises, which will relieve the pressure on government spending. Besides, the assessment system of cadres’ performance should be improved. Second, fiscal reform should be pushed forward to strengthen budget management, and to solve the inconsistency between fiscal resources and administrative responsibilities in local governments. Third, financial reform should be promoted to close the risk loopholes in local government financing from the source through investment and financing platforms. Fourth, land reform needs to be advanced to resolve the financial problems of land, and to reduce the pressure on local governments’ massive liabilities by using land.


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