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China economy
EconomyChina Economy

China debt: local government spending under microscope to protect national economy from ‘systemic risk’

  • Local Chinese cadres will be held accountable for the rest of their lives if the debt raised during their terms is found to be problematic in the future
  • Key policies or investment projects that would be funded with public money will have to undergo a ‘fiscal endurance’ evaluation

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The ratio of outstanding explicit debt to fiscal revenue - a gauge of repayment capability - reached 183.5 per cent in Tianjin (pictured) last year. Photo: Shutterstock
Frank Tang

The Chinese leadership regards the prevention of implicit local government debt risks as an “important political discipline and rule”, implying that there are plans for more forceful measures to defuse the debt bomb and lower its potential threat to the world’s second-largest economy.

It is also Beijing’s answer to lingering calls for expansionary policies, particularly the launch of new projects, highlighting its intention to shift away from an investment-driven growth model.

The requirement was released in the State Council’s Tuesday circular on budget-management reform, which vowed to standardise government spending and place higher priority on risk prevention. As part of the political commitment, local cadres will be held personally accountable for the rest of their lives if the debt raised during their terms is found to be problematic.

“We must properly handle existing [debt] piles … And we must not have new projects that could incur new implicit liabilities,” the cabinet said.

China’s overall government debt ratio expanded by 7.3 percentage points last year to 45.6 per cent of gross domestic product - the central government’s debt ratio stands at 20 per cent, and that of local governments is 25.6 per cent. The northwestern province of Qinghai and southwestern province of Guizhou were the only two where the debt ratio surpassed international warning levels of 60 per cent, registering at 81.7 per cent and 61.6 per cent, respectively.
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