China Probes Local Governments' Hidden Debts to Expose Dues Three Times the Expected
Chen Yikan
/SOURCE : Yicai
China Probes Local Governments' Hidden Debts to Expose Dues Three Times the Expected

(Yicai Global) Oct. 11 -- China's finance ministry is overhauling local governments' hidden liabilities to rein in risks of insolvency. Some regions have come out with numbers that triple their levels of debt. They, and others will have to sort out their finances in 10 years. 

The Ministry of Finance requires regional governments to submit data involving implicit debt balance and assets they held as of on August 31, the economic regulator said in a statement. In this context, implicit debt means liabilities beyond a designated limit, as well as loans secured with future funds or illegal guarantees. 

The local governments' explicit dues reached CNY16.5 trillion (USD2.4 trillion) by late 2017. This number was 76.5 percent lower than the international safety standard of 100 percent indebtedness,  data from the MOF shows, while implying that the problem was still under control.

For this year, the central government will set up a cumulative debt ceiling to CNY21 trillion (USD3 trillion) to curb risks. 

The ministry has ordered local governments to clean up their balance sheets in 10 years by paying back with government funds, selling equity or state-owned assets, Zhang Yu, a specialist at the China Public Private Partnerships Center who started dealing with the data last month, told Yicai Global. "This is a very effective measure to strictly curb implicit debts," the official at the agency under the MOF added. 

Some regions in Central China's Henan province, one county in north-central Ningxia Hui Autonomous Region, a district in northeastern Shandong province, one autonomous prefecture in northwestern Qinghai province, and a city in eastern Anhui have submitted their reports so far. 

Hidden debts in these seven locations range from 30 percent to up to 360 percent of their explicit debts. In five regions, hidden debts surpass the published levels of dues, and in two of the locales, the probe has revealed liabilities that are three times their published levels of debt. 

Some local officials have taken out excessive loans for "political achievements" by borrowing money in disguise or illegally through financing platforms, public-private partnerships, investment funds and procurement services, said Qiao Baoyun, the dean of the School of Public Finance and Policy at the Central University of Finance and Economics.

"Unclear hidden debt has hindered the administrative macroeconomic decision-making," Qiao said. In the past few years, the central government adopted an "open door, closed exit" policy in allowing the regional governments to assess their abilities in managing indebtedness but in fact, the door stayed ajar, he added. Those times are about to change. 

Editor: Emmi Laine 

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Keywords: Government Survey , Implicit Debt, Local Government Debt , Financial Risk Management , MOF