China National Radio:

Could you give us any additional details about the overall debt situation of the Chinese government? Also, please give us an introduction to the debt management reform of local governments. Thank you.

Wang Kebing:

It’s my pleasure to answer your questions. By the end of 2015, the outstanding balance of the central government bonds subject to budgetary management was 10.66 trillion yuan, and the debt of local governments was 16 trillion yuan. The total government debt in the country was 26.66 trillion yuan, accounting for 39.4 percent of the national GDP. If we take into consideration some of the contingent government liabilities, the debt-to-GDP ratio will be higher. At the end of 2014, after inspection and calculation, we determined that the contingent liabilities of local governments were 8.6 trillion yuan. Some of them have been settled during the past year. Today, around 7 trillion yuan remains unsettled.

One thing to note is that contingent government liability is totally different from government debt. It is wrong that some scholars simply add the two figures together. Government debt is the debt that a government is obligated to repay by law, but when contingent liability is concerned, in the eyes of the Audit Office, a government is only a guarantor who may need to settle it when there is a need. In general, revenue from corresponding companies can be used to cover contingent government liabilities. The government only needs to pay the debt when the guaranteed person and the debtor fail to repay it. Now, let’s suppose that the proportion of the contingent liabilities ought to be paid by the government is 20 percent, the upper limit calculated by the Audit Office in 2013, the overall government debt-to-GDP ratio will rise to 41.5 percent, but will still be lower than the EU ceiling of 60 percent and the debt situation of major market-oriented economies and emerging economies.

Generally speaking, there is room for more government debt in China. This year, following the Central Economy Work Conference’s requirements on gradually increasing the deficit ratio, we raised the national deficit-to-GDP ratio from last year’s 2.4 percent to 3 percent in order to cope with the downward economic pressure. Raising the government leverage ratio will help lower the leverage ratio of various enterprises, as it will offset the negative economic impacts brought about by the overall decrease in debt. When the leverage ratio of enterprises drops down all over the country, it will be time for the government to reduce its own leverage ratio. One more thing to note is, when raising government leverage ratio, the authorities must strictly obey the law.

Now, I’ll move on to your second question, which is about the management of local government debt. The revised Budget Law was enacted in August 2014, marking a milestone in the management of local government debt. According to the previous version, local governments were not allowed to issue bonds except when otherwise provided by the law or allowed by the State Council, but there was no specific stipulation on whether or not they were allowed to borrow through financing platforms or other enterprises.

In the past, some local governments borrowed through financing platforms to promote public infrastructure construction. We can’t deny that it was beneficial to the local economic and social development. And we also can’t deny that these local governments were liable for the outstanding debt they incurred. The governments should be honest and obey the doctrine of legitimate expectations. After inspection and calculation, the debt incurred before the implementation of the new Budget Law at the end of 2014 and indeed owed by local governments was determined to be 15.4 trillion yuan.

Since the revised Budget Law took effect on Jan. 1, 2015, local governments have only been allowed to issue bonds. According to Clause 3 of Article 35, they can’t borrow by using any other means. According to a State Council document issued in 2014, they are forbidden to borrow through enterprises or public institutions, and the latter can’t shift their debt burden to the former. According to Article 94 of the Budget Law, when a local government borrows illegally through various financing platforms, penalties will be imposed and the person in charge will be removed from office.

Under the State Council’s plan, the Ministry of Finance has cooperated with other departments to earnestly implement the Budget Law and the State Council document. We have introduced a string of measures to enhance debt management.

First, a ceiling on local government debt was imposed to curb debt growth. Last year, the National People’s Congress (NPC) asserted that the total local government debt should be limited to 16 trillion yuan. This year, the debt ceiling was raised by 1.18 trillion yuan, of which 780 billion yuan will come from the issuance of general bonds and 400 billion yuan will come from special bonds. Each government at the provincial level has its own debt quota according to debt risks. They are forbidden to raise the debt above the quota.

Second, local government bonds were issued to replace outstanding debt. This is a crucial measure to avoid systemic risks. First, it meets the requirement of the law. Under the new Budget Law, the local government can only repay its debt by issuing bonds. To meet this rule, the NPC Standing Committee has approved that the outstanding debt of local governments should be replaced by standard government bonds in three years. Second, last year, due to the downward economic pressure, local governments saw bigger gaps between revenue and expenditure. A number of local authorities saw difficulties in settling their debt. The replacement of outstanding debt can help reduce their interest burden and debt repayment pressure. In some counties, local financing platforms had problems in debt repayment. Once their debt is replaced by bonds issued by provincial governments, the risks can be greatly mitigated. Third, the replacement of outstanding debt can avoid financial risks. When there is a failure in debt repayment, the banking industry will be the first to suffer the consequences. The replacement of outstanding debt can effectively avoid risks and add to debt credibility. In some areas, the risk weight of local governments is 20 percent, but the risk weight of the previous financing platforms was 100 percent.

The third measure we have taken is including local government debt into budgetary management, so as to ensure an effective control of the debt.

The fourth measure we have taken is establishing early warning and risk prevention mechanisms for local government debt. We have issued warnings to provincial governments concerning their debt and we have asked them to draw up plans to defuse potential risks. So far, the governments of 31 provinces, autonomous regions and municipalities directly under the central government have developed their plans to defuse risks and deal with emergencies.

That’s all we have done. Thank you.

Xi Yanchun:

Thank you Mr. Wang for your professional explanation. I had the pleasure of listening to his opinion on government debt in a meeting the other day. I’m also keen to understand the situation. Mr. Wang has a full understanding of the situation and knows the figures. If you have questions on government debt in the future, you can contact the officials of the Ministry of Finance. Now, the floor is open for more questions.

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