The Jiangsu branch of China’s anti-graft watchdog has said it will target corruption and disorder surrounding local government financing vehicles (LGFVs) – known as the “money bags” of regional authorities – once again highlighting poor transparency around the platforms amid mounting debt pressure. Investigations by the provincial branch of the Central Commission for Discipline Inspection (CCDI) has found the platforms are often the culprits in bribery cases. “These platforms are the money bags of local governments,” said an article posted last week on the CCDI’s site quoting the Jiangsu Provincial Commission for Discipline Inspection. “[We will] resolutely rectify the corruption and disorder behind platform financing, and cut off the black hands that extend funds to state-owned platform companies.” How big is China’s hidden debt problem, and what is Beijing doing about it? LGFVs, which were created to skirt restrictions on direct financing by local authorities, have proliferated since the global financial crisis in 2008 when China launched a 4 trillion yuan (US$628 billion) stimulus package to fund infrastructure spending. Much of the funding subsequently ended up in construction projects that did not produce a return, leading to rapid growth of debt. Disclosure requirements for LGFVs, which specialise in off-budget financing, are weak. There is no official figure on the size of LGFV debt, which has raised concern about so-called hidden debt. The Jiangsu anti-corruption commission said investigations found some local officials have abused their position and influence to set up “shadow” companies to profit from “illegal” payments, which are made by charging intermediary fees throughout the underwriting process. In these cases, the cost of underwriting a loan or bond issued by an LGFV is inflated, adding to borrowing costs and the size of hidden debt, the anti-corruption watchdog said, without elaborating which parties were responsible for paying the local officials the fees. To lower the cost of borrowing by LGFVs in Jiangsu, the commission has recommended the provincial government cut interest rates, liquidate and clean up losses from previous investments, while stepping up control of “excessive” borrowing in construction projects to prevent debt risk piling up. The statement said LGFVs are being targeted in the CCDI’s national anti-corruption campaign, adding that the commission has already cracked down on officials and businesspeople profiting from unlicensed sales and production of chemical products. Qi Biao, the former deputy director of the Jiangsu provincial Development and Reform Commission, was sacked and expelled from the Communist Party in June after he was convicted of charging fees and accepting property for setting up operations to profit from local government financing platforms with his son. The central government has stepped up its supervision of local government debt and LGFVs in particular, but disclosure remains a weak link. While regulators have issued guidelines on local government debt disclosure, in reality, the information available to the public is often inconsistent and difficult to navigate, according to a report by the National Institution for Finance & Development (NFID) last week. The Beijing-based think tank said that poor disclosure among LGFVs remains a hurdle to the sustainable development of the local government bond market, which makes up a significant proportion of China’s 13 trillion yuan bond market. “Most of the disclosure released is macroeconomic data of various provinces, monthly revenue and expenditure of public finance … a few have some descriptions of the bonds that have been issued, mainly the total amount of funds raised and the amount used, and almost no disclosure where the investment is going into and what might the return be,” said the NFID. The penalty for violating disclosure guidelines is light, the NFID said, and there are few incentives for local governments to reveal information because most investors in LGFV debt are often banks. “Such institutions don’t make investment decisions based on financial returns and asset allocation,” said the NFID, adding that regional banks typically park their deposits with local government projects and are not required to disclose debt-related information. The NFID said the central government needs to take a “market-oriented” approach to supervise and regulate local government debt disclosure to be able to properly control risks. “To effectively manage local government debt, local government bears the main responsibility, but central government supervision and market regulations are indispensable, and high-quality information disclosure is the premise for making a difference,” it said. “The disclosure of debt information by local governments will help the central government to fully understand the debt situation of governments at all levels, more accurately allocate the debt limits of each region, and judge and control the overall debt risk from an overall perspective.”