A mechanism should be established for restraining local governmental debt expansion

For the debts of China’s local governments, “the real risks don’t lie in their scale, but lie in who will pay the debts finally.” For China’s development, the financing and investments of local governments on the construction of public utilities itself do not need restraints, the key of the problem is how to establish a more effective management mechanism under China’s current system aiming at the expansion of debts of local governments. On November 1, Cao Honghui, vice president of the Research Institute of China Development Bank, made the above remarks on the annual conference hosted by Liu Hongru Financial Education Foundation, SIFL Institute and Reinventing Bretton Woods Committee.

Cao believed that at present China’s local debt risks as a whole are still controllable. For the former “assets formed by investments” of local governments “are still generating benefits, and most of the assets are still with positive net asset value. The total debt scale is still controllable, and the total fiscal income can totally cover this part of expense, including repayment of debts.”

According to Cao, China’s local debt risk was much lower before 2010, and it quickly worsened in the three years after. While weak land auction in China hit local governments in their fiscal revenues with decreasing growth, various governmental expenses have been rising.

For the loan risks of local platforms, Prof. Cao believed that we should establish a set of total debt scale management system and constraining mechanism involving the this administration, the National People’s Congress and the superior administrative departments.

Besides, he thought that government should set a multi-channel financing pattern to transfer or avoid debt risk. For example, government can raise funds by asset-backed securitization.  

Moreover, Cao also expressed concerns about excess capacity accompanying with expanding government debts. Cao pointed out, it should rely on adjusting the whole production capacity and the industrial upgrading to conquer China’s excess-capacity problem.

Also, it’s difficult to soak up current excess capacity only depending on China’s domestic market. Cao believed China should learn the experience of Europe and push forward the regional economic integration process in Asian through establishing the interconnection and interworking infrastructures, spreading China’s production capacity to the surrounding countries to meet their demands.

According to Cao’s calculation, at present, the total investment demands in Asian regions have reached 8 trillion dollars. If China’s infrastructures can be got through with those of the surrounding countries, it’s possible to form a new market system and an emerging market economy with China as the center, radiating to the surrounding countries. He thinks that this will drive a new round of increase for the economy of the eastern part of the whole Eurasia.

Prof. Cao described related further empirical analysis. Through the combination of infrastructure construction and the economic integration process of China and the surrounding regions, Cao predicted that it would lead added 3.3% China’s economic growth rate, driving the economic growth rates of over 2% for Japan and Korea, and countries in Southeast Asia and Central Asia can also benefit from it. “But a common political foundation is needed by all countries for such a kind of behavior.”

(Caixin.com | Reporter: Zhou Qun | 2013-11-1)