Editor's note: The following is the 3rd excerpt from Shi Zhengfu's recent interview with the Shanghai Economic Review, where he spells out the need for certain financial reforms and strengthening of the rule of law. [1st excerpt; 2nd excerpt]

Shanghai Economic Review: Local governments' economic engagement is likely to result in heavy debt, increasing systematic risks in local finance and the banking industry. How can the debt problem be solved?

Shi: The key is the ratio of total debt and total assets and not the debt itself. Local governments borrow money mainly to invest in infrastructure and mechanisms to motivate and stimulate businesses, for example tax credit and talent subsidies. These are operational assets which can yield an income stream in the long run and, in actual fact, we should regulate local governments' financing activities and build supervision mechanisms.

SER: You mean we need to improve the rule of law?

Shi: Yes, we do need to improve the rule of law; especially regulation laws and we are also faced with a number of technical problems. When a company applies for bank loans, the bank will check the company's balance sheet, income statement and cash flow statement to evaluate its ability to repay debt. However, there is no strict system of supervision and evaluation when it comes to the financial affairs of local governments.

Fortunately, some local governments have been exploring innovative ways of financing. The government of Chongqing city is exploring the use of local financing platform to promote infrastructure development and the growth of SOEs and, at the same time, is formulating rules to control the debt crisis. Chongqing's blueprint has proved successful and has been copied by other local governments. In the future, I hope experts in finance, accountancy and monetary policy can combine, in cooperation with the government in order to create a set of rules and regulations for supervising local governments' financing.

We might as well consider the local governments' financing platform as a big company, and it is my hope that banks will be able to evaluate local governments' balance sheets, income statements and cash flow statements. The question is: How are these three statements prepared? Actually, from the Finance Ministry all the way down to local governments, we have yet to see the implementation of a scientific system for producing financial statements.

SER: Should we take the financial budget into consideration?

Shi: Yes, and in fact, the budget statement needs to be reformed. The current budget statement mixes the concepts of asset and debt, revenue and spending and cash inflow and outflow. Different from Western countries, we have an additional field in our public finances, namely the operational assets from investment. This makes things complicated. If we have a more scientific system of producing financial statements which is more inclusive, more reasonable and more government-oriented, it will be easier to supervise local financing and evaluate risks.

Shi Zhengfu is director of Center for New Political Economy, Fudan University and chairman of Comway Capital Group. He is also the author of the newly published book Supernormal growth: China's economy between 1979 and 2049.

The article was translated by Liu Qiang. Its original unabridged version was published in Chinese.

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.

Related

• Around China: Local government asks to "borrow" orphans for inspection
• Local government leaders of China, CEE to meet for cooperation
• Moody's warns on China's local government debt

Go to Forum >>0 Comment(s)