BEIJING Dec 31 China has banned debt-laden
local governments from raising funds through certain activities
in the latest bid to curb their borrowing and reduce risks to
the world's second-largest economy.
"We have made some progress in regulating local financial
vehicles and the trend of amassing such debt has been
effectively curbed. But recently the illegal fund raising
activities by local authorities tend to rise," the Finance
Ministry said in the circular on its website, www.mof.gov.cn
Local governments will be barred from injecting public
assets, such as government buildings, schools and hospitals,
into local government financing vehicles (LGFVs), according to
the circular, which was jointed issued with the country's top
economic planning agency and the central bank, and dated Dec.
Local governments will be prohibited from using public
assets to provide loan guarantees for LGFVs or forcing
government workers and other individuals to buy wealth
management and trust products, according to the circular.
It cited "illegal" fund-raising activities among local
governments, including raising funds through build-and-transfer
(BT) projects, providing fund injections and guarantees for
LGFVs and borrowing through finance, trust and leasing
It added that local governments cannot authorise LGFVs to
manage land reserves or use land to secure financing.
China's local governments are technically prohibited from
issuing debt or taking out loans directly but may use LGFVs to
achieve the same result. Such vehicles in the past have managed
to accrue unsustainable amounts of loan debt.
Chinese local governments have incurred debt of 10.7
trillion yuan by the end of 2010 - the build-up of which was a
consequence of a 4 trillion yuan ($640 billion) fiscal stimulus
package to fight the effects of the 2008-09 global financial
Chinese leaders are concerned that local governments may be
substituting long-term bonds for bank loans without reducing
risk, as debt issuance has increasingly become a key source of
funding for investment projects.
China's finance minister Xie Xuren said last week the
government would set up a new risk-alert mechanism and institute
stricter controls on new debt issuance.
China's National Development and Reform Commission had
earlier said it would strengthen regulation on corporate bond
issuance, including banning over-indebted firms from selling new
(Reporting by Aileen Wang and Kevin Yao; Editing by Kim