The issues on the local government bonds and the reform of the central-local relationship have received significant attention at the Third Plenary Session of the 18th CPC Central Committee this year. According to the experts’ conservative estimate, China’s current local government bonds have amounted to over 10 trillion RMB, with an annual growth rate reaching 27% from 1996 to 2010.
How have the local government bonds grown to such a large scale and at such high speed? How can the dilemma in the local government bonds be solved? Can the land finances be sustainable?
On December, 20th, 2013, forum on China’s Local Government Bonds, the last session of the “Langrun-NSD Policy Talk” Series, was held in Zhifuxuan Classroom of Langrun Garden, National School of Development.
Several financial and economic experts were invited to the forum to express their opinions on the soft constraint of the local government budget, the prospect of fiscal federalism, the relationship between the government the market and so on. The discussion was heated and in-depth. Of course, these issues cannot be solved overnight. It is hoped that this forum could provide an opportunity to make a profound analysis and comprehension of these issues.
The followings are the summaries of guests’ notable viewpoints of the day.
Gao Peiyong: Compared with dealing with the short-term, long-term institutional construction is more crucial.
Professor Gao Peiyong, President of the National Academy of Economic Strategy of the Chinese Academy of Social Sciences, held the view that long-term institutional construction is more crucial, compared with the short-term measures to the local government bonds. The local government bonds have grown on a larger scale and with a higher speed for two institutional reasons. Firstly, the local government used to maintain the wrong attitude toward performance which overemphasized the GDP growth. Secondly, China’s local fiscal system was far from perfect. The system of tax division between central and local governments was actually “the system of money division”. The local government’s power over financial affairs was mismatched with the one over administrative affairs, which led to the lack of long-term planning in local governments.
Huang Yiping: The government, the market and the enterprises should have their own roles to play.
Professor Huang Yiping, Vice-President of the National School of Development of Peking University, pointed out that the problem in the local bonds was not the stock but the flow. Financial risk would accumulate if such problems continued to exist. The soft constraint of the local government budget led to a lack of monitoring and management. Also it could result in corporatization behaviors of local governments, who played an excessive role in market competitions, and eventually had a crowding-out effect on investment of other market entities. Huang Yiping recommended that “the government, markets and the enterprises should have their own roles to play.”
Lin Shuanglin: The problem of issuing bonds must consider whether or not to allow local government bankruptcy
Lin Shuanglin, Professor of the National School of Development of Peking University, provided a detailed and accurate account of the data regarding the increment, speed, scale, cycle and debt ratio in China’s local government bonds. Then, he pointed out the reason that the infrastructure investment developed fast and the local government issued bonds beyond the budget. The approach to solve the problem was to get the economy grow faster so as to lower the debt ratio. Professor Lin also raised the question whether to allow the bankruptcy of the local governments, which started a heated discussion later in the forum.
Lv Wangshi: The senior official liability system is the main force to control the local debt.
Lv Wangshi, Director at the Foreign Finance Research Department of the Institute for Fiscal Science Research in the Ministry of Finance of PRC, thought that more attention should be paid to the positive effect of the local government bonds since there had been many discussions on the negative side. The local government bonds matched a city’s infrastructure construction, which resolve issues of inter-generational equity. On the other hand, the real estate market was cooling at present. In this case, facing the risk of hard landing, the macro economy might be harmed if the measures were too strong. Lv Wangshi suggested that two mechanisms, the market mechanism and the administrative one. In the former mechanism, the revenue bonds were repaid by the project gains. In the latter one, the bond issue was controlled by the senior officials’ liability system, the audit of profit and the budget disclosure.
Qian Li: The fiscal system has transitioned from a “unitary system” to “fiscal federalism”.
Qian Li, Vice-Chairman in the Department of Public Finance in School of Economics of Peking University, agreed with some other experts who participated in this forum on the cause of the local government bonds problem. The large amount of local government bonds resulted from the following aspects, namely, the GDP assessment mechanism of the government, the mismatch between the financial and administrative affairs both in the central and local governments after the reform of tax division, the unitary fiscal system and the lack of a hard budget constraint. The key to cure this problem is to clarify the functions of the government to avoid making a profit from the people. The fiscal system should be propelled to transit from “unitary system” to “fiscal federalism”.
Yao Yang: The deputies to the NPC should be able to seek help from specialized professionals to understand the government’s budget and fiscal accounts.
Yao Yang, Dean of the National School of Development of Peking University, thinks that the root of imbalance between local governments’ power and financial affairs lies in the fact that central government has the power of appointment and removal of personnel in local government and the central government needs to employ financial resources to transfer local officials in and out of appointments. Currently, China’s appointment hearings aren’t institutional, so it can easily lead to populism. Society should respect the constitution in the future. The deputies to the NPC should be able to understand the government’s budget and final accounts with the help of the professionals, so as to realize the democratic policy-making and the rational administration of the local government.
Xu Gao: Due to the low level of infrastructure in our country, the advantages overweigh its disadvantages for the local government bonds issued for infrastructure.
Xu Gao, Chief Analyst of Macro Economy in Everbright Securities, had the opinion that the issues of local government bonds are not pessimistic, which haven’t stepped into the debt crisis. According to a series of statistics, he said sustainability of China’s public-sector debt keeps good. But China’s infrastructures are still in a low level. In the long term, it is beneficial for local governments to contract a loan on infrastructure construction. Xu Gao suggested that the way to solve problems of local government bonds is to allow governments and markets play their own roles. Investment projects of non-marketization should depend on the methods of non-marketization for financing.
Zhang Fan: The fiscal federalism will not be realized overnight, and we could draw lessons from foreign experience on supervision and legislation.
Zhang Fan, Professor at the National School of Development of Peking University, thought that there were some valuable merits in the US supervision mechanisms for local government bonds, especially the related bankruptcy laws and regulations and the federal government’s assistance system. It is the federal government’s promise of non-assistance that reduces the moral risk of state governments. Even though China cannot accomplish fiscal federalism in one stroke, we can draw lessons from America in the aspects of supervision, assistance programs, bankruptcy legislation, and so on.
Zhao Quanhou: The softness of the local government budget should be reduced in a progressive manner rather than in one step.
Zhao Quanhou, Minister at the Finance Research Department of the Institute for Fiscal Science Research in the Ministry of Finance of PRC, held the view that some experiences in Japan's westernization were worth learning. He thought that it would be arduous to harden China’s local government budget. A more realistic approach was to reduce the softness of budget gradually rather than to complete the budget hard constraint in one step which was hard to realize in the US. The transparent, legitimate, normative and effective financing was the direction for its future development.
Wei Jianing, the Deputy Minister at the Macroeconomic Research Department in the Development Research Center of the State Council, expressed his viewpoints on the issue of the local government bonds as well.
After the speeches, an interactive Q&A session was carried out between the media journalists, the NSD students and the guests on the issues about the crowding out effect of the local government bonds and the junk bonds.
