China tightens control of local government financing

CHINA will act to correct “irregular behavior” in local government fundraising as Beijing attempts to rein in financial risk and potential threats to economic stability.

A joint announcement by six government agencies, including the finance ministry, central bank and securities and banking regulators, said local authorities should start “self-examining their financing practices as soon as possible” and to rectify all irregularities by the end of July.

The move follows calls from several high-ranking officials for measures to tackle alarming levels of leverage, Reuters reports.

In January, the finance ministry announced new measures to control local government debt, including placing a cap on outstanding debts and tighter management of new bond quotas.

The latest statement said China will seek to create a clearer boundary between local government and their financing vehicles, which it said should “transform into market-based state-owned enterprises that can stay clear of government intervention”.

Local authorities are already strictly prohibited from injecting public assets into local government financing vehicles (LGFVs) or using expected land revenue as debt repayments for LGFVs, the agencies said.

Local governments are allowed to set up investment funds with private companies and conduct public-private partnerships, but debt financing is strictly prohibited.

The ministry of finance said it will also take steps to establish a monitoring and risk control mechanism and promote better information disclosure.

In 2015, Chinese local governments issued nearly 600bn yuan (£67bn) in new bonds and converted another 3.2 trillion yuan in outstanding debts to low-interest bonds under a bond-for-debt swap programme.

Beijing introduced the swap programme and put a cap on new debts to defuse risks, and is trying to increase the incomes of local governments.