China’s top legislature passed an amendment to the Budget Law laying the legal framework to let more local governments sell bonds directly to raise funds for projects of public interest.
Under quotas approved by the State Council, local authorities can sell debt to invest in such projects. Bond sales to finance day-to-day expenditures remain prohibited, along with all forms of credit guarantees to individuals or entities, according to a statement issued today by the standing committee of the National People’s Congress in Beijing.
President Xi Jinping vowed to make policy changes to the nation’s tax and budget systems at a Communist Party meeting in November last year as local borrowings jumped 67 percent from the end of 2010 to 17.9 trillion yuan ($2.9 trillion) in June 2013. Almost 40 percent of this came from off-budget funding through financing vehicles. Moody’s Investors Service said the accumulation will be a burden on the carry risks to the central government’s finances.
“China is rolling out its most wide-ranging fiscal reforms
since 1994,” Zhong Liang, Hong Kong-based credit analyst at
Standard & Poor’s Ratings Services said on Aug. 27. “These
important policy changes should press local government to
rationalize their spending and reduce their capacity to
aggressively borrow. Off-budget local borrowing will be
gradually phased out.”
The Politburo of the Communist Party approved a general plan on June 30 to change the existing fiscal and tax system as part of the broad reform plan mapped out in the Third Plenum in November. Priorities include improving supervision of government budgets and building a modern budget system. The plan is looking to complete the most important jobs by 2016, and achieve the goal by 2020.
