This presentation was made by Li XU, ADBI, at the 13th Annual Meeting of OECD-Asian Senior Budget Officials held in Bangkok, Thailand, on 14-15 December 2017

1. Li Xu, Senior Economist, Research Department , ADBI
ADBI, Tokyo, Japan, Nov.30, 2017
Reforms in Managing Local
Government Debt in the People’s
Republic of China

2. Main issues
2
Brief review of Local Government Debt ( LGD )
management in the People's’ Republic of China(the PRC)
What is the current situation of LGD in the PRC?
What reforms have been implemented?
The effects of these reforms
New challenges are facing Chinese government
What are the next steps?

3. 3
Brief Review of LGD
Management in the PRC

4. Two Stages: New Budget Law is the
watershed of borrowing behaviours of
Chinese local governments
Local governments
were not authorized
to issue debt directly
before the revision of
the Budget Law
New Budget Law
(2014)
Local governments
can issue LGD after
the New Budget Law
took effect in
Jan.1,2015
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5. The First Stage: before the amended
Budget Law in 2014
 How to finance the gap between fiscal revenue and public
expenditure: Local governments mainly depended on setting up
some companies, which is called local government financing
vehicles (LGFV) for the construction of public interest projects.
 In 2009, the State Council approved Ministry of Finance (MOF) on
behalf of provincial governments to issue local government bonds.
 The scales of local government debt as of December 31,2014:
the outstanding debt of local governments was about RMB 15.4
trillion.
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6. The Second Stage: After the New Budget
Law Took Effect in 2015
 In 2014, the National People’s Congress (NPC) amended the budget
law. The New budget law allows provincial governments to raise LGD
directly, but only in the name of Local Government Bonds(LGBs).
 In 2014, after amending the budget law, the State Council also
published the Opinions on Strengthening the Administration of
Local Government Debts, which proposed a detail legal system
framework to standardize the debt financing of local governments.
 From then on, relevant rules and regulations have been issued by the
State Council to promote the standardization, institutionalization and
transparency of LGD management.
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7. What are the major differences
between the two stages?
Before the New Budget Law After the New Budget Law
 LGs can’t borrow directly.
 Loose rules and regulations
 Soft budget constraints. LGD
was not included in budget.
 Repayment Mode:
significantly depends on
Land Sale Revenue.
 Risk assessment: relatively
higher level of possible risk.
 Provincial LGs can raise LGBs
directly and publicly.
 A series of rules and regulations
for strengthening management
and supervision of LGD
 Strict budget constraints.
 Repayment Mode: fiscal
revenue, government funds,
projects earnings, etc.
 Risk assessment: lower risk.
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8. 8
What is the current
situation of LGD in the PRC

9. The Status of Managing LGD in the PRC
Sustain
able
Affordable
Stable
9

10. The Status of Managing LGD in China
Supporting Data
Institutional
Guarantee
Repayment
Guarantee
10

11. Supporting Data---Stability
The Outstanding LGD
in 2016
• The outstanding
LGD was RMB
15.32 trillion in
2016, which was
controlled
within the limit
of RMB 17.19
trillion as
approved by the
NPC.
LGD Ratio in 2016
• The ratio of
outstanding
LGD to
corresponding
comprehensive
financial
capacity in 2016,
was 80.5%,
lower than
international
standard.
LGD+ CGD in 2016
• The total outstanding
public debt throughout
China have reached
RMB 27.33 trillion. The
debt ratio (outstanding
debt obligations/GDP)
was 36.7%
(Central:16.1%;
Local:20.6%), which was
not only lower than EU’s
warning line of 60%,
but also lower than that
of major market
economy countries and
emerging economies.
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12. An International Comparative View
LGD ratio in PRC showed
declining trend these years
Subnational Govt Debts ratios of
advanced countries were higher
than that of PRC since 2014
12
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
Outstanding Subnational Govt Debts over GDP
in Selected countries
Australia
Canada
France
Germany
Japan
United Kingdom
United States
Greece
Ireland
Italy
Portugal
Spain
China
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
22.0%
24.0%
26.0%
2014 2015 2016 2017
RMBBillions
Outstanding Public Debt and Debts over GDP
in PRC
Outstanding
CGD(billion)
Outstanding
LGD(billion)
Outstanding
CGD/GDP
Outstanding
LGD/GDP

13. Institutional Guarantee---Sustainability
 Debt Ceiling Management---Upper limit of the scale of
LGD determined by the State Council and approved by NPC
or NPC Standing Committee.
 Categorization of Management---Local government
general debt(LGGD) for public welfare projects without
earnings and local government special debt(LGSD) for public
projects with earnings.
 Supervision Mechanism---MOF is in charge of the
supervision and management of Chinese LGD, the National
Audit Office of the PRC has the responsibility of external
supervision.
 Risk Assessment and Early Warning Mechanisms---
the designs are underway.
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14. Repayment Guarantee---Affordability
Golden Rule
• Strictly
prohibited
within capital
projects,
• not recurrent
expenditure
Fund
Guarantee
• Fiscal revenue
for LGGD,
• Government
Funds or
project
earnings for
LGSD.
Material
Guarantee
• High quality
assets
• Convertible
assets
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15. 15
What reforms have been
implemented?

16. What Reforms have been implemented
Establishing Credit Rating and
Information Disclosure Mechanism
Diversifying the Investors
Performing Risk Assessment and Early
Warning of LGDs
Establishing the Risk Emergency
Settlement Mechanisms of LGD
Strengthening supervision of LGD
Implementing Pilot Projects of LGSB
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17.  Credits of all local government bonds must be
rated before issuing.
 Local governments are required to disclose their
debt information on time.
 Setting up the Positive list and the Negative list in
order to prohibit the disguised debts in the name
of the governments.
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Establishing Credit Rating and
Information Disclosure System

18. Diversifying the Investors
 Besides the inter-bank market, MOF motivates local
governments to issue bonds in exchange market and pilot
free trade zones as well.
 Data shows:
-----Shanghai government issued bonds of RMB 30 billion in
Shanghai Stock Exchange, RMB 3 billion in Shanghai Pilot Free Trade
Zone in 2016 .
-----As of Oct.2017,RMB 700 billion of LGBs were issued at Shanghai
Stock Exchange and RMB 1 billion at Shenzhen Stock Exchange.
-----The number of individual investors increased correspondingly.
Nearly 30,000 individual persons subscribed over RMB 1 million in LGBs
by Oct.2017.
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19. Performing Risk Assessment and Early
Warning of LGDs
 Since 2015, MOF has annually organized the debt risk evaluations
for local governments at all levels through the comprehensive
application of debt ratio, debt service ratio and other indexes.
 To send the notification on local government debt risk situations to
related departments and each provincial government.
 To urge certain provincial governments to prepare risk resolution
planning or emergency settlement plans to raise funds from
multiple channels to eliminate the risks of outstanding debts.
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20. Establishing the Risk Emergency
Settlement Mechanisms of LGDs
 To establish the hierarchical response mechanisms.
implement classified emergency response, strictly
implement the accountability, make a systematic
arrangement of the emergency settlement of LGD risks.
 To make the emergency policy reserves of the risk
incidents. The objectives are to achieve the reasonable
risk sharing between the creditors and debtors and to
enhance their abilities to cope with the debt risk
emergencies.
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21. Strengthening supervision of LGD
 Establish the Normalized Supervision Mechanism.
Officers from local offices of MOF are authorized to conduct in-
situ investigation, achieving the normal supervision over local
government debts.
 Strictly Investigate & Punish and Disclose the Illegal debts
and Illegal Financing Guarantee.
According to the handed-over auditing clues and special reporting
clues from individuals, MOF organizes its subordinate offices
nationwide to check the illegal debts and illegal financing some
local governments.
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22. Pilot Projects of LGSB
 Improve the management of LGSB.
 Carry out the pilot projects for Land
Reserves, toll roads and other selected key
fields across the country.
 to realize the self-seeking balance between
the projects benefits and financing under
the legal limit of LGSD.
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23. The Effects of these
Reforms in the PRC
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24. Achievements of these Reforms
Supporting the Implementation of
Active Fiscal Policy
Standardizing LGD management for
Risk Avoidance
Reducing Financing costs
Diversifying the investment entities
Promoting LGB Market to Grow
Rapidly
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25. Pushing Forward the Supply-ide Structure
Reforms
Promoting steady growth of
local economy
LGDs are mainly financing for
public interest projects
 The newly-added LGBs in 2015,
2016 and 2017 were RMB 600
billion, RMB 1.18 trillion and
RMB 1.63 trillion, respectively.
 Financing for public welfare
projects (such as poverty
alleviation, shanty town
reconstruction, etc.), the Belt
and Road, the Joint
Collaborative Development of
Beijing, Tianjin and Hebei
Province, Yangtze River
Economic Belts, etc.
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26. Standardizing LGD Management
 With rapid conversion of existing debts, the management
of LGBs has become much more standardized.
 The accumulated existing debts converted to bonds in
accordance with the Budget Law in 2015 and 2016
approximated RMB 8.1 trillion.
 The standardized bonds already accounted for nearly 70%
of the local debts by the end of 2016. Local government
non-bond debts have declined sharply, less than RMB 2
trillion estimated by the end of 2017.
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27. Standardizing LGD Management
(to be cont.)
 Outstanding debt by the
end of June 2013
 Outstanding debt by the
end of December 2016
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LGBs,
5.6%
non-LGBs
94.4%
LGBs,
69.4%
non-
LGBs,
30.6%

28. The Financing Cost is Reduced, and
the Repayment Pressure is eliminated
 Average interest of LGBs was much lower than that of existing
LGD before swap. The issuing rate of LGBs averaged 2.93% in 2016,
much lower than previous costs for the debts raised through ways
other than government bonds, and the interest costs reduced
throughout the year approximated RMB 400 billion.
 LG repayment pressure is also relieved. From 2015 to September
2017, the accumulated outstanding LGDs replaced nationwide are
RMB 10.2 trillion, which had alleviated the risks of outstanding LGDs
and would be conducive to improving the institutions and individuals
received repayments consumption abilities.
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29. The Investment Entities have been
diversified
 Policy banks, security companies, fund
companies, insurance companies, and foreign
banks hold higher proportion of LGBs than before
at various levels.
 Domestic commercial banks hold less.
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30. Market size of LGBs grows rapidly
 In 2016, the issuance of LG bonds was RMB 6.05
trillion with about 60% year on year growth, 17%
of the total issuance volume of China bond
market.
 By the end of 2016, the outstanding obligation of
LGBs equaled RMB 10.63 trillion, 16.7% of the
total outstanding bonds in the market.
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31. New Challenges are facing
Chinese Government
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32. New Challenges
At present, LGDs in the PRC are at the manageable level ,
but new challenges and obstacles have shown as follows:
 Illegal guarantee: some financial institutions still
require LGs to provide a covenant of warranty.
 Non-standard financing in disguised forms still
exists: in some areas, the scope of government
purchased services has been illegally expanded; fake PPP
projects(promising to buy back the principal or bearing
the principal loss of social investor’s, etc.)
 The investor base needs to be more diversified.
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33. What are the Next Steps
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34. What are the next steps
The basic principle: undoubtedly persisting in blocking the back
door and safeguarding the front door by controlling the increasing
volume of LGD and fighting against illegal debt financing and
guarantee.
 Enhance the supervision of local governments to carry out debt
management regulation, further strengthen debt ceiling
management, insist on LGs debt financing solely by issuing LGBs
to resolve to curbing the implicit debt increase.
 Strictly implement accountability system. Urge LGs to fulfill
their entity responsibilities and improve the system of
accountability, responsibility claim and investigation, to improve
the government performance assessment system for lifelong
accountability and responsibility tracing.
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35. What are next steps (to be cont.)
 Accelerate the market-oriented transformation of
financing platform companies and urge financial
institutions to perform the compliant and prudent
operations to realistically strengthen risk control and
maintain fiscal sustainability.
 Improve information disclosure and credit rating
system.
 Steadily promote the reform of LGSB management.
 Further diversify the investor base.
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36. Conclusions
 LGD in China is stable, sustainable and affordable.
 New challenges still exist.
 Further reforms are expected.
When the sun is shining, we should fix the roof!
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37. Thank you！
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