China issues new rules on infrastructure financing due to implicit debt concerns
- Restrictions on financing by public-private partnership comes after the government eased rules last month regarding the funding of local infrastructure projects
- Beijing wants to boost local infrastructure projects while also avoiding the debt excesses of the past amid the trade war with the United States
China has taken actions to regulate a major tool for local governments to leverage support for their infrastructure construction after the latest nationwide financial audit indicated continued local violations of rules that threaten to further increase an already mountainous level of implicit debt.
The government has worked hard to curb hidden liabilities, including off-budget sheet borrowing and financial guarantees, amid its deleveraging campaign to reduce excess debt and risky lending over the last two years.
Beijing has vowed to stabilise economic growth in a range 6.0 to 6.5 per cent in 2019 amid the increasing impact of the US trade war on the economy, but the government also wants to keep a lid on inappropriate, off-budget financing that could pose a rise to the financial system in the future.
In this regard, the National Development and Reform Commission (NDRC) said in a circular released on Monday that all public-private partnerships (PPP) projects must undertake a series of feasibility studies and undergo government reviews to ensure their legitimacy.
“The feasibility studies should not only focus on the social, technology and economic fronts, as well as the environment, investment and financing, but also consider the necessity [of the project], its operational efficiency and risk management,” it said.
The seed funds for PPP projects must meet the minimum requirement set by the State Council and “tools such as government repurchase agreements and guaranteed investment returns are forbidden” to curb implicit debt.
The top economic planner also said local officials must apply for government approval if there are major changes to a project, such as the construction site, its size, its standards or if costs are more than 10 per cent higher than budgeted.
The new regulation came after the National Audit Office found in its latest investigation that 16 of China’s 31 provincial level governments had not yet made debt contingency plans. It also found that 11 regional governments have not yet released any plans to resolve their existing excess implicit debt, which totalled 17 billion yuan (US$2.5 billion) at the end of 2018, while some plans already announced were actually found to be infeasible. Also, around 29 billion yuan (US$4.2 billion) of capital raised from debt in 35 regions was idle because of poor project coordination.
The official local debt figure was at a “controllable” level of 19.9 trillion yuan (US$2.9 trillion) by the end of May, the audit office said. However, according to an estimate by ratings service China Chengxin International, implicit local debt, which includes debt incurred by local financing vehicles, state-owned enterprises and government responsibilities in partnership projects, could surpass 30 trillion yuan.
Beijing has so far refrained from implementing a large-scale infrastructure construction programme, but did announce in March a 2 trillion yuan (US$291 billion) business tax cut to help stabilise the economy.
National fixed asset investment grew only 5.6 per cent in the first five months of this year, down 0.5 percentage point from the January to April figure, while infrastructure investment growth also slowed by 0.4 percentage point to 4.0 per cent.
Liu Xuezhi, a senior analyst with the Bank of Communications, said the new rules show that the government fears that implicit debt could surge after the funding requirements for local infrastructure projects were relaxed.
Investment is unlikely to post a large rebound in the near term, with the growth rate hovering around 7 per cent, compared to 5.9 per cent last year, because of government’s deleveraging programme and implicit debt curbs.
“Growth will be driven largely by consumption this year,” he said.
Beijing has sped up local government bond issuance with a total of 1.93 trillion yuan (US$281 billion), or 63 per cent of the annual bond quota, sold in the first five months of 2019.
Last week, Finance Minister Liu Kun said that “[local governments] must not raise debt illegally no matter how difficult their fiscal condition is.”