Markets welcome move by the State Council to bring in transparency

The decision by the top legislature to introduce a debt ceiling for local governments is good news for the market.

Last week, the National People's Congress Standing Committee approved a motion proposed by the State Council, or cabinet, to bring in a $16 trillion yuan ($2.5 trillion) debt quota for 2015.

By the end of 2014, Beijing recognized local government "direct debt" had reached 15.4 trillion yuan, while "indirect and contingent liability" added up to 8.6 trillion yuan.

The direct debt was a 41.4 percent increase compared to June 2013 and means local governments have accumulated a total debt close to Germany's GDP.

Creditors can now breathe a sigh of relief. By bringing in a cap on future borrowing by local governments, Beijing has guaranteed the repayment of 15.4 trillion yuan of debt, and possibly the 8.6 trillion yuan that is likely to occur in the future.

But a line has been drawn on future local government borrowing.

In short, the central government has rolled out an "amnesty" by saying it would not call to account local officials who went on reckless borrowing binges before the end of 2014. It has pledged to clean up the mess that was left behind, while making it clear that from now on local governments must borrow within their means.

Future lending will be based on "a transparent and consistently enforced formula as opposed to being determined on an ad hoc basis", Fitch Rating Inc said after the government's announcement.

This is long overdue as China has walked a long way to reach this point.

A report by China International Capital Corp showed that regional officials tended to fudge their debt figures before the national audit in 2013 because they feared a central government backlash, so the actual debt growth between mid-2013 and end-2014 is not as strong as the data suggested.