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Some local governments bear excessive debts

Although the total amount of local government debt is in the security range, the government should not ignore potential risks of local government debt.

Jia said that there are at least two reasons caused the excessive debts of some local public sectors. First, the transparency of local government debt was obviously low in the past. A large number of hidden debts were formed under unspoken rules and it is difficult for related departments to obtain the statistical information on those debts in a timely fashion. Second, the social cost to pour oil on troubled waters is very high once contradictions could not be concealed.

Experts speculate that according to the current audit results, the debt ratio of 78 municipal and 99 county-level governments is more than 100 percent, accounting for nearly 20 percent and nearly 4 percent of the total number of municipal and county-level governments respectively, indicating relatively large potential risks. More than 70 percent of debts are used for railway investment and bridge and land purchase. This indicated that the assets of local governments would increase along with the increase in liabilities.

Large-scale debt is also a test to the banking industry. Bank loans accounted for nearly 80 percent of the total 10.7 trillion yuan of debt. Financial expert Ye Tan believes the default rate of the current local government debt may far exceed the previous size of banks' bad loans because banks mainly indirectly finance bad loans. Therefore, the negative impact on China's banking in the post-crisis era is far from over.

Adopting multiple measures to reduce risk

Effectively reducing debt risks facing local governments has topped the agenda of the central government in its efforts to rectify last year's auditing problems. The State Council said during an executive meeting that the problems relating to debt repayment and follow-up financing of local government projects under construction should be handled properly under the principle of making classification management and taking different approaches to different problems.

The central government will continue to strengthen local government financing unit management. Financial institutions should actually step up risk identification and management, strictly observe borrower admittance conditions and perform review and approval procedures according to commercial principles. Illegal loan guarantee practice of local governments should firmly be banned. Meanwhile, it is necessary to research and establish a standardized borrowing and financing mechanism for local governments.

In terms of the way to address the hidden local government debt issue, Jia said that the key is how to turn "hidden rules" for local government financing practice into "transparent rules." Local government financing practice should become transparent so that it should properly dispose existing local government debt and move to avoid new ill local government financing practice.

He stressed the necessity of establishing a transparent local government financing system. The suggestions put forward by audit departments have already incorporated such contents, including the establishment of a local government bond system and the revisions to related laws and regulations. It is proposed that local governments may issue municipal government bonds that are matched with local projects so as to make local government debt transparent, under public supervision and subject to other types of supervisory systems.

In terms of local government debt management and repayment, Liu Shangxi, deputy director of the Research Institute for Fiscal Science under the Ministry of Finance, said that local governments should not only establish an overall local government debt management framework to classify, monitor and analyze various classes of local government debt but also clarify and define the relationship between financing platforms and local governments.

Ma Guangyuan, a member of the Chinese Academy of Social Sciences, said that to eliminate China's local government debt risk, it should resolve the institutional problems related to the tax sharing system as soon as possible and reduce local governments' reliance on land use rights sales. Local governments' excessive reliance on the revenue from land use rights sales exposes that local economies cannot generate enough revenue from their real economic sectors or small and medium-sized enterprises and can only live on land use rights sales. This evidently is a vicious circle.