Local Debt Risk Driving Turf War as PBoC and MoF Toss Hot Potato

Asia Times: Dancing in the dark when it comes to China’s debt plan

Conflicting views

Indeed, this illustrates that there are conflicting views at the top of President Xi Jinping’s administration when it comes to the economy. Broad policy is being run by Xi’s confidante, Vice-Premier Liu He, a Harvard-educated economist who has taken a tough stand on corporate and local government debt, and is part of the powerful Politburo.

Before he made the speech, Xu would have cleared it with his boss at the PBOC, Yi Gang, the central bank governor. Yi, who was also educated in the United States, is understood to be in Liu’s camp.

As for the Ministry of Finance, it comes under Liu Kun’s remit. Relatively young at 61, he is also chairman of the Budgetary Affairs Commission of the National People’s Congress, the country’s legislature, and was only named as China’s new finance minister earlier this year.

Known as a softly-spoken fiscal reformer, his main brief is to crack down on rising debt at local government level and deleverage state-owned enterprises. It appears this is proving challenging with Xu pointing out that the Ministry of Finance has struggled to get a grip on these problems and has failed to provide “enough support to state-owned financial institutions.”

“Lowering local authorities’ willingness to pay off debt, which would pass the fiscal risks to the financial sector, [are] moves [which] may lead to moral hazard … and even trigger systemic risks,” he said.

Nikkei: Chinese city misses payday as Xi reins in shadow banks

The little-known Hunan Province city of Leiyang drew unwanted attention nationwide in early June after failing to pay civil servants, exposing the municipality's fiscal woes amid a crackdown on shadow banking.

"I have been paid. No need to worry," said a Leiyang city worker of more than 20 years, who gave only the name Liang, showing a deposit statement. Payments had been put in on June 8 and June 22 for about 3,900 yuan ($583). The former was a late payment for May, while the latter was for June, right on time.

"The city is moving away from its main industry of coal mining, so a lot of things can happen," Liang said. Many of the small mines surrounding the city were quiet as the municipal government has shut them down to cut overcapacity.

...In 2015, Leiyang issued through its financing vehicle two tranches of bonds totaling 1.9 billion yuan, resulting in an annual interest payment of 130 million yuan. Principal repayment also began in 2018. The city is scheduled to pay back 380 million yuan each year from 2018 to 2022, and the first payment of 140 million yuan was made in April, the month before it failed to deliver workers' salaries.

Previously, local governments could have covered the shortfall by turning to the country's shadow banking system of unregulated lenders. But President Xi Jinping has begun cracking down on such lenders as he moves to rein in financial risks. Leiyang may be short on funds as it searches for financing from other sources. "The city is apparently rushing to sell its assets," said the owner of a shop outside the municipal offices.

Also see Tip of Iceberg Hit: Chinese City Overdue on Illegally Raised Shantytown Renovation Shadow Loans

These bits are relevant to the article below:

In fact, this is just the tip of the iceberg of local invisible debt. In the past, some local governments used the PPP and government purchase of services to illegally raise money. Of course, including the above-mentioned concerns, the shed reform loans have brought hidden troubles to local hidden debts.

The monetization of sheds has increased the hidden debt risk of local governments to a certain extent. Only by returning to the nature of "shed reform", the local government debt in the shed reform will gradually become "visible", and the government leverage ratio (i.e. government debt/GDP) will be closer to the true level.

...Part of the disguised debt here is the local financing platform, including the city investment company to endorse the government credit endorsement. Since its inception, City Investment Corporation has not been a fully market-oriented company, and it has inextricably linked with local governments.

iFeng: 财政部再出招：财政金融不分家才是金融风险的症结所在

The central bank and the financial system full of gunpowder debate entered the second week. On July 17, the Ministry of Finance's official website quietly hanged a research article by the Hunan Commissioner's Office, "Hunan Commissioner's Office on Preventing Financial Risks Reflections.

The author's orientation can be found from the title of the article.

The local government's financing platform has become an intermediary institution that mixes public finance and finance [the financial sector], resulting it impossible to separate public finance and finance. This may lead to a low rate of return on public financial investment projects, high cost of government financing, and systemic risk in the financial system. Not only will it bring about the rapid expansion of the shadow banking system and the difficulties of private enterprise financing, but also the uncertainty of the ownership of local financing platform debt.

Therefore, we must further clarify the relationship between public finance and finance, regulate the investment and financing behavior of local governments and financial enterprises, “get through” and strictly implement the “Budget Law” and the “Opinions of the State Council on Strengthening Local Government Debt Management” (Guofa [2014] No. 43) and other documents require...

Original title: Thoughts on Preventing Financial Risks by Hunan Commissioner

Source: Ministry of Finance

The central government has repeatedly proposed to "prepare and prevent major risks from attacking and defending, and the focus is on preventing and controlling financial risks." At present, China's financial risks are generally controllable, but they need to be highly vigilant.

For example, local government debts have “exposure” risks, and the new debts are larger, forming debt risk accumulation, and there is a tendency for debt “transfer”, “invisibility” and complexity to increase, some PPP And the government's purchase of service projects is not standardized and produces hidden debt risks; shadow banking activities are too active, scale is rapidly expanding, there are problems such as maturity mismatch, high leverage, and the phenomenon of financial alienation and behaviors such as detachment and self-circulation From the essence of the financial services real economy; in addition, the potential financial risks in the new financial format, real estate and other fields can not be ignored.

China's state-owned economy dominates the national economy, the financial sector is dominated by the state, and many financing activities involving government credit exist in large numbers, which means that the financial sector must bear greater responsibility in the prevention and control of financial risks. As the local commissioner of the Ministry of Finance, financial and financial supervision should be strengthened from the following aspects.

I. To clarify the relationship between public finance and finance.

It is well known that the important function of finance is to promote the optimal efficiency allocation of social resources and ensure economic stability and development. Finance refers to the financing of funds, and its purpose is to promote and support the real economy. Financial policies that support finance (tax reduction, industrial support policies, etc.) can promote the development of the financial industry and provide vitality for the development of the real economy, thereby improving the efficiency of resource allocation and promoting economic growth. At the same time, it will expand the tax base and increase the country's fiscal revenue.

At the same time, a stable financial market can in turn guarantee the stability of the country's economy and avoid the impact of domestic and international economic fluctuations. Therefore, financial and financial relations are close. This is especially true in my country.

The local government has established various local government financing platform companies responsible for financing various projects of local governments. The financing of these platform companies includes not only the on-balance sheet loans of commercial banks, but also various channels such as loans in the form of shadow banking systems and financing in the form of bonds.

Therefore, the financing platform of local governments has become an intermediary institution that mixes public finance and finance, resulting in the inseparability of public finance and finance. This may lead to a low rate of return on financial investment projects, high cost of government financing, and “rigid redemption” of the financial system. Not only will it bring about the rapid expansion of the shadow banking system and the difficulties of private enterprise financing, but also the uncertainty of the ownership of local financing platform debt.

Therefore, we must further clarify the relationship between finance and finance, regulate the investment and financing behavior of local governments and financial enterprises, “get through” and strictly implement the “Budget Law” and the “Opinions of the State Council on Strengthening Local Government Debt Management” (Guofa [2014] No. 43) and other documents require that we carefully understand and fully implement the spirit of the 19th National Congress of the Communist Party of China, the deployment and requirements of the National Financial Work Conference, etc., and play a good role in the fight against the major risks of preventing and resolving major risks.

II. Grasp the key areas of financial risk

To prevent financial risks from breaking through, and the current local government debt has become a financial risk issue worthy of attention. In recent years, in order to resolve the local debt risk, the new budget law passed in 2014 puts the barbaric growth of local debt into budget management for the first time. It is clear that the only legal channel for local government borrowing is to issue local government bonds. In order to control the scale of local debt, the central government imposed a debt limit on local governments in 2015, giving a “ceiling” of debt.

Since the beginning of this year, the central government has maintained a high pressure on local government debt supervision. But even so, local debt is still "can't stop."

“No. 50 Document” and “No. 87 Document” have comprehensively regulated and restricted government guarantees, PPP, and government purchase services. Although these new regulatory policies have blocked the existing financing channels in the form of negative lists, they have achieved The supplementary upgrade of Circular No. 43 also refines the implementation of the above provisions, but has not fundamentally eliminated the initiative of local governments to indebt, and the hidden debt of local governments remains high. Some local governments through the platform companies may still use the channel business, investment guidance funds "clear stocks" and illegal use of PPP and government purchase services to disguise financing, forming implicit debt.

Theoretically speaking, the judgment criteria of local government implicit debts are not based on financing entities and financing channels, but on whether financing returns use financial funds to carry out “end-of-the-go commitments”. Therefore, restricting financing entities and controlling financing channels cannot effectively control local government implicit debts. Local governments can still use fiscal funds to easily evade regulatory policies through various types of financial “innovation”. The Financial Commissioner should take advantage of local and proximity in terms of information and measures, and pay close attention to the dynamics of hidden debt.

III. Do a good job in relevant data statistics and risk early warning research

In recent years, financial innovation has become more and more, banks, securities, insurance and other industries between business cross-over, capital exchanges are becoming more and more complex, to be risky "in mind", urgent A unified statistical standard and risk monitoring “panorama” is required.

At present, there are gaps in the statistical system for financial risks, data standards are not uniform, statistical techniques are single, data organizations are scattered, information collection and use are difficult, and sharing mechanisms are imperfect; cross-cutting financial activities, systemically important financial institutions, and finance Insufficient statistical monitoring in key areas such as holding companies, risk warning data is not sensitive; macro risk statistics are weak, and policy effect evaluation data is insufficient; some financial activities are outside the financial statistics system, and basic data are not sound.

Therefore, as a financial commissioner, it can cooperate with the financial supervision departments such as the PBOC, the Yinbao Supervisor, and the Securities Regulatory Commission to do the statistical work of relevant data, so as to identify early, early warning, early detection and early disposal. At the same time, we must do a good job in financial risk warning research.

Due to the suddenness and transitivity of financial risks, it is required to focus on financial risks in risk warning. Risk warning and prevention are often more effective than post-crisis treatment. Establishing a financial risk early warning system will help financial regulatory authorities allocate resources reasonably, gain time for early handling of crisis and loss reduction, and provide guidance for financial institutions to identify problems early, so as to adjust business strategies early and resolve potential risks.

Therefore, it is extremely necessary to establish a flexible and effective financial risk early warning system, which will help to consolidate the foundation for maintaining the safe and sound operation of the local economic and financial system.