Move part of efforts to check growth in borrowings, prevent systemic risks

China will take "much stronger" moves to curb illegal or irregular borrowing by local governments, to prevent debt growth that may spark systemic risks, a senior official with the Ministry of Finance told China Daily.

The upcoming campaign will include more strict investigation on provincial level governments' fundraising procedures, giving severe punishment to local government officials who resort to improper activities and regularly publishing information about illegal cases, according to the official from the ministry's budget department who declined to be named.

He said that by the end of October, the country's incremental local government debt was calculated as 16.8 trillion yuan ($2.56 trillion) by the Ministry of Finance, under the annual 18.8 trillion yuan ceiling that was set by the National People's Congress, the country's top legislature, in March.

Among the 16.8 trillion yuan local government debt, 10.56 trillion yuan borrowed from the local government financing vehicles－including asset and wealth management products and bank loans with short-term maturity and high interest rates－has been replaced by long-term government bonds, aiming to tame default risks.

"Another 1.9 trillion yuan debt as estimated will be swapped into bonds in 2018," he said. Besides, updated data about the total local debt amount will be released soon.

Debt ceiling for local governments next year will be adjusted according to the macroeconomic situation and fiscal deficit ratio after discussions at the NPC. The annual local government debt ceiling always equals the last year's quota with the addition or deduction of a certain adjusted part.

If the economy suffers downside risks and requires proactive fiscal policy, the quota for the year's new debt could be enlarged moderately, according to the ministry.

The annual Central Economic Work Conference concluded on Wednesday reiterated plans to strengthen management of local government debt, as one of the key measures to tackle fiscal and financial risks, and to ensure high-quality economic development that has been set by the conference as the major theme of next year's policies.

Recently, the finance ministry investigated the borrowing activities of Jiangsu and Guizhou provinces, and punished government officials, who resorted to illegal activities for raising debt, with dismissals, demotions and disciplinary warnings.

China has tightened management of local government debt since 2014, and the policy framework has been improved gradually, including the introduction of a debt ceiling and the launching of an emergency disposal mechanism for debt defaults.

Liang Ji, a researcher from the Chinese Academy of Fiscal Sciences, said that the incremental part of local debt has contracted after the policy tightening. "Pressure of borrowing new debt to repay the existing amount has also eased to some extent."

Finance Minister Xiao Jie said earlier that by the end of 2016, the balance indebtedness of both the central and local governments reached 27.33 trillion yuan, accounting for 36.7 percent of the total gross domestic product, under a warning limit of 60 percent given by the European Union. The total local government debt was 15.32 trillion yuan, which was 80.5 percent of the fiscal income in 2016, also at a lower level than some major economies and emerging countries.