China moves to defuse local government debt bomb
Finance Ministry tells several local provinces to investigate possible illegal loan guarantees, part of a wider problem of ‘misaligned incentives’
China’s Finance Ministry is investigating possible irregularities in the ways several local governments have obtained loans, as part of wider efforts to keep borrowing in check and avoid widespread defaults.
According to a notice seen by the South China Morning Post, the ministry last month asked provincial governments in Inner Mongolia, Shandong, Henan, Chongqing and Sichuan to address the irregularities.
The notice was copied to the Ministry of Commerce and the China Banking Regulatory Commission, asking the two bodies to pay special attention to the institutions involved.
Local governments have racked up sizeable debt, often via financial vehicles, to back massive infrastructure or public projects that have little chance of eventually generating cash flows to repay the loans.
To tackle the problem, the central government has been bailing out local governments by swapping debt for long-term, low-interest bonds. By the end of last year, the mainland had converted 8.1 trillion (HK$9.1 trillion) worth of debt through such transactions.
But local officials are finding ways to skirt the rules. In one case in the ministry’s notice, the Zhumadian government in Henan province promised to guarantee a loan of 640 million yuan from China Construction Bank that was given to a financial vehicle controlled by the local government.