China to Impose Quota on Local Government Debt Amid Risks
China announced plans to cap the amount of debt local governments can take on and ban them from additional borrowing through financing vehicles as authorities step up efforts to control risks to the financial system.
All borrowing by provinces and cities will need to be within a quota set by the State Council, China’s cabinet, and approved by the National People’s Congress, according to a statement posted to the central government’s website today.
China’s borrowing spree since the global financial crisis has prompted economists including those at JPMorgan Chase & Co. to compare it to debt surges that tipped Asian nations into crisis in the late 1990s and preceded Japan’s lost decade.
China’s stock market is closed through Oct. 7 for a weeklong holiday after the Shanghai Composite Index (SHCOMP) gained 12 percent this year. The offshore yuan strengthened 0.2 percent, the most since June, to 6.1658 per dollar as of 2:35 p.m. local time inHong Kong.
Debt levels will be included as a “hard criteria” to evaluate officials, the statement said. Local governments will be granted “limited discretion” over borrowing, including issuing bonds for public-service projects. They should ensure financing for existing projects, it said.
Provinces and cities had previously side stepped rules banning them from directly issuing debt or taking bank loans by setting up thousands of companies to raise money for roads, bridges and sports stadiums.
China will only allow local governments to borrow for capital expenditures on non-profit projects and “moderately” for repaying existing debt, according to today’s statement. They won’t be allowed to raise money for general spending purposes, it said.
Source: bloomberg- China to Impose Quota on Local Government Debt Amid Risks
