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Fitch: China Local Gov't Bond Law to Improve Budget Transparency
September 4, 2014 / 7:06 AM / 3 years ago

Fitch: China Local Gov't Bond Law to Improve Budget Transparency

(The following statement was released by the rating agency) HONG KONG/SINGAPORE, September 04 (Fitch) The revisions to China's Budget Law, passed on 31 August, represent a significant reform, providing a framework for significantly greater transparency and accountability for local government debt management, says Fitch Ratings. Fitch expects that these changes will eventually improve the quality of budget management and the debt sustainability of local authorities. The moves will also facilitate efforts by central government to align local authorities' objectives more directly with public service provision. Fitch believes the measure is a step forward in a long-expected process to manage China's government debt issues through the migration of liabilities on to the sovereign balance sheet. This view is reflected in China's 'A+'/Stable rating. The new budget law provides a framework for regulation that includes clear guidelines, in addition to formalising long-running proposals to enable local governments to issue debt directly for the first time. Local governments have not hitherto been allowed to issue debt directly on their own credit profile (barring a few trial programmes), as they have relied partly on off-balance sheet local government financing vehicles (LGFVs). This means that local authorities (and by extension, the sovereign) could potentially be exposed to a rise in explicit debt stemming from LGFVs. The new framework includes requirements to establish multi-year rolling budget plans, placing local revenues and expenditures under the supervision of local peoples' congresses, creating a debt-alert system, and rules to ensure that capital raised through bond issuance is for public service-related capex and not for operational spending. It also requires the publication of local governments' balance sheets, local government bonds to be rated, and mandates central government oversight. Ultimately, these reforms are likely to result in the channeling of LGFV debt to a more transparent bond market. This would be credit positive for local government entities. This reform is part of a broader structural policy agenda introduced as part of the Third Plenum of the Chinese Communist Party's Central Committee in November 2013. In addition to new rules governing debt issuance, privatisation is also a key part of the plan linked to address the growth in local government debt - to USD2.9trn (about 30% of GDP) as of the latest central government audit in June 2013. It is as yet unclear as to the extent or form that privatisation will take place, but sales of part of local state-owned enterprises' stake could help in reducing overall indebtedness. The efforts at privatisation and the steps taken to resolve local debt issues have the potential to transform regional budget management in China over the medium to long term. However, this might not immediately address the risks associated with LGFV debt or the broader issues that Fitch has highlighted concerning potential rises in explicit public debt and contingent liabilities. This is especially the case owing to the slowdown on the growth of land sales in 1H14 and the reliance of local governments on land sales for revenues. Implementation of the revision to the budget law will take time - and for the time being, the lack of timely and comprehensive data on local government debt remains a factor impacting the transparency of Chinese local debt management. Contacts: Terry Gao Director International Public Finance +852 2263 9972 Fitch (Hong Kong) Limited 2801 Tower Two, Lippo Centre 89 Queensway Hong Kong Andrew Colquhoun Senior Director Sovereigns +852 2263 9938 Justin Patrie Senior Director +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: China here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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