Beijing calls for better control of local government debt

China’s central government has called for better control of local authorities’ budgets and spending, and tighter debt control after an audit of dozens of local authorities uncovered a series of violations, including tax levies illegal loans, illicit borrowing and mismanagement of special obligations (SPB).

The State Council, the Chinese government, made the recommendations in its annual audit report (link in Chinese) which was presented to lawmakers on Monday. The 25-page document covered a range of issues, including improving the budget system and accountability, poverty reduction spending and carbon neutrality.

Local government debt, especially hidden loans, has risen over the past year and a half as central authorities halt their deleveraging campaign and call for more public spending to tackle the crisis caused by the crisis Covid-19 pandemic. Local governments were allowed to lift billions of yuan through the issuance of SPB to stimulate investment.

As a result, local government debt has skyrocketed and is now back in the sights of policymakers as they refocus on their long-running campaign to tackle mountains of borrowing and hidden financial risks. accumulated over years of capital expenditure. At a meeting of the State Council in March, Premier Li Keqiang said the government leverage ratio should be reduced this year.

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In detail: record local government debt is back in the sights of policy makers

As part of its annual follow-up, the State Council asked the National Audit Office (NAO) to investigate public debt management in 55 tax jurisdictions: 17 provincial-level regions, 17 cities and 21 counties . He revealed that at the end of 2020, they had combined debts of 5.07 trillion yuan ($ 790 billion), although the average debt ratio is 13 percentage points lower than that of the previous year, according to the annual report.

He concluded that the SPBs had been mismanaged and funds used to finance unprofitable projects. Some 41.3 billion, or 3.25%, of the 1.27 trillion yuan of SPB circulating in the 55 locations had not been used for their intended purpose. Five regions invested a total of 20.5 billion yuan in projects with no income or whose annual income was insufficient to pay principal and interest, raising serious concerns about their creditworthiness, according to the report.

SPBs were introduced in 2015 to fund commercially viable infrastructure and public welfare projects. They are supposed to be reimbursed from the income generated by the specific projects they finance, unlike “general obligations”, which can be reimbursed from general tax revenues.

The NAO also audited five centrally managed financial firms and two local banks and found that five of them illegally provided finance to local governments and Local Government Finance Vehicles (LGFVs) for a total of 58 , 1 billion yuan.

The audit also found that 15 provincial-level cities and regions had granted financial incentives amounting to 23.9 billion yuan through tax breaks that they were not allowed to do. Some local governments levied illicit taxes and collected taxes in advance, with 20 regions collecting nearly 3 billion yuan through unnecessary or advance payments from 111 companies and 21 regions obtaining 938 million yuan in advance of 1,081 construction companies.

The Council of State’s activity report offered a series of recommendations to address the problems it uncovered, including strengthening budget management and planning, and cleaning up illegal tax refunds in order to avoid loss of tax revenue that could affect fiscal sustainability. Regarding local government debt, the report says real-time monitoring needs to be strengthened, accountability needs to be improved, and hidden liabilities need to be identified so that implicit debt can be controlled.

Contact publisher Nerys Avery (nerysavery@caixin.com)

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