China’s State Council issues contingency guidelines on local government debt problems

BOFIT Viikkokatsaus / BOFIT Weekly Review 2016/48

The contingency guidelines require local governments to report risky borrowing, placing them in one of four “debt risk” categories. The State Council repeated its stance that the central government would not bail out indebted local governments, and that they must instead manage the debt themselves. If a local government is unable to handle its debts, the State Council said it expects them to refrain from new investment projects, suspend on-going projects or sell off assets. In addition, other public expenses could be cut and staff laid off. Local governments have been encouraged to think about beforehand how to pay off loans they take. The new guidelines are intended to help reveal risks, create response plans for crisis situations and improve risk awareness of local government financiers.

The IMF estimates that the indebtedness and other liabilities of local governments totalled roughly 40 % of GDP at the end of 2015. Local governments this year have issued about two times more bonds than a year ago. Some of these assets have been used to pay off more expensive bank loans. The debt situation varies considerably across provinces, however. A finance ministry official interviewed by the Caixin news agency in November said that debt levels of some local governments were alarmingly high, along with a degraded ability to service that debt. Despite the risks, the yields on local government bonds are nearly the same as government bonds, and the government’s latest measures did little to change the situation. If local governments find themselves in great difficulties, the central government might be forced to bail them out, even if it had given repeated warnings that it would not.

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