On Monday, the Standing Committee of the National People’s Congress of China convened and discussed a plan to increase the debt limit on local governments as reported by the state-run news. This step is aimed at finding a solution to the rising issue of the hidden debt within the books of local governments.
While addressing the committee meeting, Finance Minister Lan Fo’an proposed a plan whereby the new debt will be incurred in order to supplant and cover for the repaying of the current hidden debts which would otherwise be dangerous. This is the kind of debt that is hardly shown in the government balance and poses challenges to budgeting management. During a press conference last month, Lan also explained why exactly the ceiling of government debt would be raised — to calm the situation with the local authorities’ indebtedness.
In China, local authorities have always been in charge of raising funds for delivery of many services to the public, for instance, building of roads and other infrastructures. However, with the aggressiveness of the economies down and revenues from lands on sales declining, these revenues have become inadequate. This has caused hidden debt level increases of around hidden challenges 50 – 60 trillion yuan ($ 7 to 8.45 trillion), according to Ting Lu, Chief China Economist at Nomura.
In more recent observations, Lu argued that there might be up to 10 trillion-yuan worth of new debt quotas that could most probably be approved over the next few years, in order to replace a fraction of this invisible pile of debt. If faced with a further deterioration of economic conditions, it is possible that Beijing is prepared to raise the debt swap ceiling to 15 trillion yuan even.
Zhao Leji, Chairman of the National People´s Congress (NPC), this is probably the last time the NPC Standing Committee goes without approving any more measures to ease the economy which has been slowing down in the recent months. The discussions within this committee are expected to wrap up on Friday.
This proposal to expand borrowing limits for local governments is a part of the wider strategy of the central authorities addressing the concern with the regional deficits and their impact on the overall economic growth.
