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

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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. Photo: Xinhua

Published: 7:00pm, 1 Jul 2019Updated: 7:00pm, 1 Jul 2019

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.

But warnings from analysts that the campaign could cause a sharp slowdown in investment growth caused the government to loosen rules on local infrastructure financing in June, allowing local governments to use the proceeds of bond sales as well as bank borrowing, rather than local tax revenues, to finance the start of projects.

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.

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. Photo: Xinhua

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.

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