China must curb rapid growth in local government debt, top economist warns

CHINA must rein in soaring local government debt and introduce reforms to improve transparency, a leading government economist has warned.

Li Yang, chairman of the National Institution for Finance & Development, told a forum on regional development that local government debt stood at between 17.5 trillion and 21.3 trillion yuan - £2 trillion to £2.4 trillion - at the end of 2016. This accounted for between 23% and 28% of the country's GDP, the New York Times reports.

"We can't take a laissez-faire attitude towards local government's excessive growth in debt," Li said.

"We must reform."

China's growing debt mounting is an increasing concern for global investors, the Times said, and efforts to stimulate the economy threaten to amplify the problem. Last month, Moody's Investors Services downgraded China's credit ratings for the first time in nearly three decades, saying it expects growth to slow and debt to rise in coming years.

Although he criticised the downgrade as "unreasonable", Li said local government must change its ways after using "new tricks" to get around laws introduced in 2015 to restrict their debt issuance.

These included setting up purportedly government-led funds to attract private money from what the newspaper described as "questionable" sources for state investment. Some have stretched their budgets and even used "maintaining social stability" as a reason to ask for central support, Li said.

He urged reforms to give market forces and private investment a greater role at local level, as well as rules to improve transparency and ensure local government stick to their budgets.

Li's warning comes after Beijing introduced tighter controls on local government finances, seeking to create clearer boundaries between local government and their financing vehicles. Officials said these vehicles should become "market-based, state-owned enterprises that can stay clear of government intervention".

Local governments were also ordered to start "self-examining their financing practices as soon as possible" with the aim of correcting any irregularities by July.

In January, China also introduced measures to cap outstanding debt and place greater control on bond quotas.