China’s finance ministry has banned local governments from raising illegal or non-compliant debt for municipal infrastructure projects that yield no or insufficient returns, in a bid to curb so-called hidden debt.
On Monday, the Ministry of Finance, along with five other ministries, revealed they had urged local governments at the end of July to “follow approval procedures”, “ensure money sources” and “strengthen budgetary controls” of infrastructure projects to prevent debt risks.
As part of the rules concerning municipal infrastructure asset management, revenue generated from infrastructure financed by local government special bonds must be prioritised to repay the bonds and cannot be diverted for other uses.
In 2018, the Ministry of Finance asked local governments to clean up hidden debt within five to 10 years, which it said at the end of 2022 had shrunk by more than one-third.
In response to the concerns on local debt risks, the finance ministry stressed on Monday that risks were overall “controllable,” with the scale of hidden debt “gradually declining”.
China is seeking to clean up the massive hidden debt piled on local governments, which have been placed under increased pressure due to a prolonged property downturn that slashed the land sales that had been a major source of their revenues.
Fiscal revenues dropped by 2.6 per cent in the first seven months of the year compared to 2023, the finance ministry said, falling short of the full-year growth target of 3.3 per cent.
“To fill this gap, it would mainly rely on a rebound in economic fundamentals, non-tax support, and over-expected issuance of treasury bonds,” said Wu Qiying, a senior macro analyst at GF Securities.
In terms of broad fiscal revenues, the sluggish land market is still a drag
Revenue in the government fund budget fell by 33.6 per cent in July year on year, with income from land use rights sales plummeting by 40.3 per cent.
“In terms of broad fiscal revenues, the sluggish land market is still a drag,” Wu added.
“This trend is unlikely to reverse in August.”
In an article published in the August issue of a Communist Party journal, the finance ministry’s party group pledged to deepen the reform of the fiscal and tax systems to accelerate the establishment of “a fiscal system compatible with Chinese-style modernisation”.
Globally, government debt is also on the rise, with data from the Institute of International Finance showing that it had reached a record high of US$91.4 trillion by the end of March.