context: Combating local debt was a priority set out at the Central Economic Work Conference in December 2020 and at the March 2021 Two Sessions. The macro-leverage rate's increase in 2020 due to the COVID-19 stimulus caused further concerns.
State Council issued ‘Opinions on deepening budget management system reforms’, specifying
- general requirements
- guiding thought
- basic principles
- upholding Party leadership
- strengthening the legal framework
- adopting goal-oriented methods
- maintaining baseline thinking
- increasing budget revenue coordination to enhance financial security
- standardising budgetary expenditure management and fiscal expenditure
- implementing strict budget preparation and management to enhance budget integrity
- strengthen budget implementation and performance management to enhance its binding effect
- strengthening risk prevention and control to enhance fiscal sustainability
- allowing LGFVs (local government financing vehicles) to go into bankruptcy to clear up debt
- enhancing fiscal transparency and improving the level of budgetary digital management
Drawing market attention was the inclusion of LGFV bankruptcy. While not a new idea, it had been discussed in official documents as early as 2018, according to Mao Jie 毛捷 University of International Business and Economics professor, with recent debt defaults putting the spotlight back on local government debt issues. The long-term goal is to strip off the government financing function of LGFVs and resolve debts through marketisation and rule of law, explains Luo Zhiheng 罗志恒 Yuekai Securities Research Institute. LGFV bankruptcy has been rare, notes Wen Laicheng 温来成 Central University of Finance and Economics, adding that LGFVs normally just go through mergers or reorganisation without declaring bankruptcy. According to a CICC research report, by end 2018, the interest-bearing liabilities of local financing platforms exceeded C¥30 trillion, 34 percent of GDP. In addition, their cash flow to current debt obligation ratio was is only 0.4.