By Xie Yaxuan (謝亞軒), Head of Macroeconomic Research at China Merchants Securities

Nation, Page 16

Issue No. 538, Sept 26, 2011

Translated by Zhu Na

Original article: [Chinese]

 The National Audit Office estimates that local government debt had reached 10.7 trillion yuan by the end of 2010. In order to solve the problem with this borrowing we need to be clear about the objectives. From a macro perspective, the short-term goal should be to avoid large number of bad loans that would threaten trust in banks. The mid- and long-term goal is to establish a fiscal system that suits China’s national conditions, clarifying the responsibilities, rights and restrictions for local governments raising debt.

The first problem is controlling inflation. Repayment of local government debt cannot rely on revenue generated from the government-investment projects. The governments’ ability to repay debts needs to be guaranteed by promoting faster growth of the economy and government revenue. The major threat to growth and local debt is from inflation.

The second issue is with regulation binding on local governments. It needs to cover the means they use for financing as well as borrowing limits and the responsibilities of repayment.

The third focus should be the extension of bank loans. The basic practice is for short-term loans to be extended to long-term ones. Another similar measure is to allow local governments to issue more local government bonds.

As well as these points, we still need systematic reform to deal with the root of the problem. At least the current round of reform attempts to shift the focus of local governments onto providing services to citizens, a change from the system that has hitherto encouraged local officials to pursue unsustainable growth.