Central government increases scrutiny of local government borrowing arrangements

The Chinese media outlet Caixin reports that officials established a new system for oversight of local government indebtedness at the beginning of May. The arrangement seeks to take a pro-active approach to reducing systemic risk. Six major agencies and commissions are involved in the supervision effort.

Even as the central government has tightened local government budget policy and borrowing, local officials keep devising new ways to avoid scrutiny and take on new debt. Caixin's list of recent avoidance tactics included public-private partnerships (PPP), use of various funds for bond issues and procurement contracts that effectively increase the local government's debt load. The new rules limit the use of such gimmicks.

The IMF estimated last summer the total debt of local administrations and their financial vehicles was on track to exceed 33.4 trillion yuan ($4.8 trillion), or 42 % of GDP, by the end of 2016. The IMF put the combined debt of central and local governments (including their financial vehicles and other off-budget borrowing) at about 60 % of GDP.