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Prof. Justin Lin Proposes Adjusting Fiscal Policy to Solve Local Debts

Mar 10-2022   



China should modify its fiscal system to enable local governments to better cope with their debts, said Prof. Justin Lin Yifu in an interview with China Business Journal prior to the annual Two Sessions, namely the National People’s Congress and the Chinese People’s Political Consultative Conference.

 

According to previous regulations, the local governments were forbidden to take on fiscal deficits. However, to carry out countercyclical fiscal policy, the local governments had raised debts through investment platforms and thus pushed up their leverage ratio, said Prof. Lin.

 

Still, China’s overall debt volume, even if factoring in debts of all local investment platforms, remained a modest proportion of its GDP as compared to other countries, not to mention that most local debts were used on infrastructure constructions which generated returns and reduced the net liability of local governments, said Prof. Lin.

 

In fact, the most serious challenge for local investment platforms was the mismatch between short debt-servicing time and long investment duration, hence the need for an institutional fix. To circumvent the no-deficit rule, reforms had been undertaken to allow the Central Government to issue debts for local governments – debts which were not included into the balance sheets of the local governments. However, to address the issue in the long run, Prof. Lin proposed amending the fiscal system to allow the local governments to incur budget deficits after meeting certain conditions and improve the debt-issuing mechanism for local governments. Through lawful procedures, the local governments could work on long-term financing and mitigate the mismatch between debt payment and investment cycle.

 

In the interview, Prof. Lin also shared his take on the Chinese economy and its financial reforms. He remained confident that the country still had growth potential of 8% annually up to 2035 due to considerable investment and growth space in industrial structure upgrading, new economy, new energy and infrastructure construction. Meanwhile, he cautioned against the faux flouring of the financial industry in some regions.

Prof. Justin Lin Proposes Adjusting Fiscal Policy to Solve Local Debts

Mar 10-2022   



China should modify its fiscal system to enable local governments to better cope with their debts, said Prof. Justin Lin Yifu in an interview with China Business Journal prior to the annual Two Sessions, namely the National People’s Congress and the Chinese People’s Political Consultative Conference.

 

According to previous regulations, the local governments were forbidden to take on fiscal deficits. However, to carry out countercyclical fiscal policy, the local governments had raised debts through investment platforms and thus pushed up their leverage ratio, said Prof. Lin.

 

Still, China’s overall debt volume, even if factoring in debts of all local investment platforms, remained a modest proportion of its GDP as compared to other countries, not to mention that most local debts were used on infrastructure constructions which generated returns and reduced the net liability of local governments, said Prof. Lin.

 

In fact, the most serious challenge for local investment platforms was the mismatch between short debt-servicing time and long investment duration, hence the need for an institutional fix. To circumvent the no-deficit rule, reforms had been undertaken to allow the Central Government to issue debts for local governments – debts which were not included into the balance sheets of the local governments. However, to address the issue in the long run, Prof. Lin proposed amending the fiscal system to allow the local governments to incur budget deficits after meeting certain conditions and improve the debt-issuing mechanism for local governments. Through lawful procedures, the local governments could work on long-term financing and mitigate the mismatch between debt payment and investment cycle.

 

In the interview, Prof. Lin also shared his take on the Chinese economy and its financial reforms. He remained confident that the country still had growth potential of 8% annually up to 2035 due to considerable investment and growth space in industrial structure upgrading, new economy, new energy and infrastructure construction. Meanwhile, he cautioned against the faux flouring of the financial industry in some regions.