China calls for ‘strict accountability’ at local government levels where funds are misused

State Council says it is forbidden to use public funds for ‘luxurious office buildings and halls, vanity projects and unnecessary landscaping works’
In recent weeks, top Chinese officials have expressed concerns about mounting headwinds facing the world’s second-biggest economy

China's economic recovery

Amanda Lee

Published: 2:35pm, 25 Nov, 2021

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China’s State Council says local governments should be held accountable for wasteful spending, as Beijing seeks to strike a balance between controlling growing debt risks and maintaining steady economic growth.

While China’s overall debt level has stabilised and is steadily declining, the economy is facing “new” downward pressure, according to a report by the official Xinhua News Agency on Wednesday after the State Council executive meeting, which was chaired by Premier Li Keqiang.

As such, it is necessary to strengthen the oversight for local government debt to ensure that funds are used to expand domestic demand and promote consumption, according to the council, China’s cabinet.

“It is strictly forbidden to use funds for luxurious office buildings and halls, vanity projects and unnecessary landscaping works,” the council said, adding that misusing funds, violating borrowing guidelines and letting public funds sit idle must be “resolutely” prevented.

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“If problems are found, serious rectifications and strict accountability must be implemented,” the council added.

Last month, the State Council named and shamed eight local government projects in four western provinces over their loose debt policies, and it told local officials to “strictly follow fiscal discipline” in its latest effort to rein in mounting local government debt and excessive borrowing in the property sector.

Over the past few weeks, Li and the People’s Bank of China have increasingly expressed concerns about mounting headwinds facing the world’s second-biggest economy.

The central government promised a new round of supportive measures for smaller companies to protect jobs and growth, while the central bank said it will keep liquidity reasonably ample.

China to use ‘variety of tools’ to help ensure reasonable economic growth

While Beijing has stepped up its supervision of off-budget lending by local governments, to control so-called hidden debt risks from local government financing vehicles (LGFVs), regional authorities have been also asked to speed up the borrowing in the form of special purpose bonds. These are designed to fund infrastructure projects, which boost investment during economic slowdowns.

However, the quota for special-purpose bonds – which was around 3.65 trillion yuan (US$571 billion) in 2021 – was deemed too small to cover hefty infrastructure borrowing.

US rating agency Moody’s estimated in a report on Thursday that local governments could see a 5.1 trillion yuan shortfall in available fiscal funding next year, up from 4.9 trillion yuan this year, and the incremental funding burden is likely to be shared by the central government and local governments.

“However, we expect the central government to remain committed to its longer-term policy objective to contain contingent liabilities of regional and local governments arising from debts on LGFVs’ balance sheets,” Moody’s said.

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