BEIJING, Dec 31 (Reuters) - 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. 24.
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 companies.
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 crisis.
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 bonds.
Reporting by Aileen Wang and Kevin Yao; Editing by Kim Coghill