NSD Symposium Explores Directions for Debt-Clearing Plans
At a meeting in late July, The Political Bureau of the Communist Party of China (CPC) Central Committee set forth the task of formulating and implementating a package of debt-clearing plans to defuse local debt risks. Since then, a number of debt-clearing paths have been put forward by the economic circle, including the issuance of re-financing bonds to replace hidden debts, or negotiations with financial institutions on debt swapping and extension. At a symposium at the NSD on September 10, experts believed containing further debt escalation is the prerequisite for handling current debt inventory.
Prof. Yao Yang, Dean of NSD and BiMBA, pointed out that it is rather easy to clear debts in the short term but difficult to stabilize local government debt level over the long run. The reasons for the uncontrollability of debts, he said, chiefly lie in political economy. Judging from the previous two rounds of debt clearing, the 1.5 trillion-yuan debt swap as reported by the media is not a good solution and will allow opportunism for local governments, he said. According to media reports, special re-financing bonds is likely to be re-launched in the second half of the year at a value of 1.5 trillion yuan and with more quotas for 12 provinces that are under high debt pressure, such as Tianjin, Yunnan, and Guizhou.
To prevent further growth in debts, Prof. Yao suggested making SOE budget implementation and final accounts part of that of equal-level governments, as well as allowing financing platforms to go bankrupt. Only by simultaneously strengthening supervision and market discipline can local debts be prevented from constant ballooning, he said.
Zhang Ming, Deputy Director of both the Institute of Finance and Banking of Chinese Academy of Social Sciences and National Institute for Finance and Development, said that as local governments are grappling with shrinking land-sale revenues, the central government should take charge of the overall planning of social welfare outlays, such as pension, medical care, and unemployment benefits. Besides, infrastructure financing should be conducted through treasury bonds or provincial government general bonds, and cities under should be forbidden to resort to marketized financing to fund infrastructure construction. He also suggested that local government assessment system should be adjusted by linking GDP growth with debt levels.
Prof. Mao Jie, Director of the Education Department of University of International Business and Economics and Professor of its School of International Trade and Economics, pointed out that China’s local debts are mixed public debts, making the clearing job extremely difficult. Of local debt holders, 82.54% are commercial banks, about 70% are large commercial banks, and less than 10% are regional financial institutions, according to statistics of the Ministry of Finance. Such hybrid nature might be behind its recurring off-and-on growth that has spanned cycles. He said to clear debts, their quasi-treasury bond nature should be gradually removed, so as to turn them into real municipal bonds or local government bonds. He also noted that the returns for some ad-hoc bond projects have been artificially pumped up to justify feasibility and increase appeal.
Hu Jiayin, NSD Assistant Professor and China Center for Economic Research (CCER) researcher, said that an optimal debt-clearing plan would need to balance liquidity risks and moral risks and prevent piling on new debts before the old ones are wound down. Identifying, swapping and clearing current stock of debts must go hand in hand with a check on the local governments’ financial capacity to fulfill their functions. International experiences show that when governments step in to rescue banks, sovereign debt crisis might be induced as a country only has a limited capacity to take on debts, she said.