Ministry of Finance (MoF) issued ‘Notice on further standardising local government debt financing’ together with five other top government bodies in early May 2017, prohibiting local governments from illicit borrowings and standardising PPP models.
Violations are still prevalent, despite multiple rounds of regulatory crackdowns, writes Du Tao 杜涛 Economic Observer. As the leading ministry on reigning in local government borrowing, MoF has been tightening pertinent regulations, he adds.
Illicit borrowing continues even with tightening regulations, Du says, because
- the cap on new local bonds - on top of bonds issued to replace existing debt—cannot meet their investment needs that support an expansionary fiscal policy in times of economic downturn
- local government officials obsessing over GDP growth makes them prioritise boosting investments and growth over controlling debt level despite MoF restrictions
While abolishing high-powered incentives based on local economic growth is unlikely, central government must lift the cap—allowing local governments to issue and service bonds and enhancing information disclosure requirements on bond issue, argues Du; otherwise, taking on illicit borrowing will remain tempting.
There is no quick fix to local debt financing problems, contends Du, increasing the bond cap by small margins will only create more problems.