The Chinese leadership regards the prevention of implicit local government debt risks as an “important political discipline and rule”, implying that there are plans for more forceful measures to defuse the debt bomb and lower its potential threat to the world’s second-largest economy. It is also Beijing’s answer to lingering calls for expansionary policies, particularly the launch of new projects, highlighting its intention to shift away from an investment-driven growth model. The requirement was released in the State Council’s Tuesday circular on budget-management reform, which vowed to standardise government spending and place higher priority on risk prevention. As part of the political commitment, local cadres will be held personally accountable for the rest of their lives if the debt raised during their terms is found to be problematic. “We must properly handle existing [debt] piles … And we must not have new projects that could incur new implicit liabilities,” the cabinet said. China’s State Council says local governments must ‘tighten their belts’ and cut debt China’s overall government debt ratio expanded by 7.3 percentage points last year to 45.6 per cent of gross domestic product - the central government’s debt ratio stands at 20 per cent, and that of local governments is 25.6 per cent. The northwestern province of Qinghai and southwestern province of Guizhou were the only two where the debt ratio surpassed international warning levels of 60 per cent, registering at 81.7 per cent and 61.6 per cent, respectively. The local government debt ratio is widely believed to be underestimated, with considerable debt said to be buried deep in some state-owned enterprises , financing vehicles and public-private partnership projects. The Ministry of Finance conducted a major investigation into off-budget government debt in 2018, and ordered that there be no further increase on that year’s level. However, the actual level was never publicly revealed. The consensus among market analysts is that it was much larger than the recognised amount of 26 trillion yuan (US$3.97 trillion) at the end of February. The top legislature warned last month that the implicit size was still rising in some regions, and it pushed for the compilation of local government balance sheets. We must coordinate development and security, immediate and long-term objectives, and forbid unrealistic promises State Council circular In the new circular, the State Council banned unauthorised local borrowings via corporations and financial institutions. Meanwhile, financing vehicles will now be prohibited from providing funding to local authorities, while ailing vehicles could be restructured or even liquidated. “We must coordinate development and security, immediate and long-term objectives, and forbid unrealistic promises,” the circular said. “The bottom line of no systemic risk must be defended.” Key policies or investment projects that would be funded with public money will also have to undergo a “fiscal endurance” evaluation, it said. Local authorities are being ordered to make mid- and long-term fiscal budget plans, so their fiscal capabilities and risks will be more transparent. The debt mountain is largely a result of the more than decade-long investment drive that started with the 4 trillion yuan stimulus in 2008 to fight the global financial crisis. In a Q&A released on its website, the finance ministry conceded that there are risks in grassroot fiscal operations, local government debt, social security and the finance sector. The government already lowered its fiscal deficit ratio and condensed general expenditures for this year, to highlight fiscal sustainability. The central government has long made it clear that it will not bail out local fiscal failures stemming from debt, and it is now introducing a series of parameters, mainly involving the debt ratio, to enforce de-risking. Chinese authorities warn bond issuers they can’t ‘run away’ from their debts According to an estimate by Zhongtai Securities, the ratio of outstanding explicit debt to fiscal revenue - a gauge of repayment capability - stood at a national average of 97 per cent last year and could surpass the warning line of 100 per cent in 2021. About 17 of China’s 31 provincial jurisdictions have already set off warning alarms, including Tianjin, where the ratio was 183.5 per cent last year. Many have suggested that solving the funding gap requires a bigger portion of tax revenue ending up in local coffers. The central government has also reduced the local government special-purpose bond issuance quota to 3.65 trillion yuan (US$557 billion) from 3.75 trillion yuan last year.