No bailouts if local govts default on debt repayments

China will deal with hidden outstanding local government debt in a law-based, market-oriented manner without resorting to central government bailouts, the Ministry of Finance said.

The stance was stated in a written reply to a proposal on preventing and defusing hidden debt risks of local governments, made by one of the members of the National Committee of the Chinese People's Political Consultative Conference, the nation's top political advisory body, last year. The reply was made public on the ministry's website on Thursday.

The ministry said it will introduce a mechanism to handle debt defaults in a marketed-oriented and law-based manner to properly defuse any potential financial risks at the local government level. Any debt risks would be fairly shared among debtors and creditors, and the principle of "no bailout from the central government" will be strictly adhered to.

Debt defaults will be addressed in a category-specific manner. Irregularities in government investment funds, public-private partnerships and government procurement services will be rectified.

Concerns over local governments' debt default risks have grown in recent weeks. On Dec 30, Zunyi Road and Bridge Construction (Group) Ltd, a local government financing vehicle — LGFV — in the southwestern Guizhou province, said it plans to extend the repayment of 15.6 billion yuan ($2.3 billion) of bank loans by 20 years.

On Tuesday, Finance Minister Liu Kun said in an interview with Xinhua News Agency that standardizing LGFVs is an integral part of regulating debt default risks of local governments.

The general expectation that repayments of debts at the local government level are guaranteed as the central government will step in with bailouts in the worstcase scenario, shall be dispelled, he said. Efforts will be made to advance the market-based transformation of all LGFVs in a category-based manner, to draw a clear boundary between the government and enterprises, and to push sustainable fiscal development.

Gao Ruidong, chief macro economist at Everbright Securities, said that in recent years, local government debt has been increasing rapidly, and the pressure to repay it has intensified. This has limited the wiggle room to adjust the country's fiscal policy accordingly.

"We believe that standardizing the regulation of LGFVs doesn't mean it will limit local governments' development. Rather, this should encourage local governments to sustain their fiscal growth in a more sustainable manner," Gao said.