China’s debt will be one of the many important topics on the agenda for the upcoming 19^th CPC National Congress. Last year, the country’s local governments issued new debt worth over $900 billion, a surge of about 60 percent. Aware of the risks, authorities have rolled-out measures to reduce the local debt burden.

CGTN’s Luo Yu reports.

One of biggest threats to Chinese financial stability is local government debt. This is a side effect of the country’s construction binge following the 2008 global financial crisis. Local government financing vehicles – LGFVs – issued Chengtou Bonds – urban construction and investment bonds – using land-use rights as collateral.

“For this LGFV bond, one very unique feature is the government implicit guarantee,” Professor Laura Liu Xiaolei of Peking University said. “Aasically, investor purchased this bond, and believed this would be implicit government guarantee.”

China is getting tougher on local government debt with more oversight of irregularities.

Local governments used to not be allowed to borrow, and instead could only issue debt. Xiaolei says because of this they resorted to “borrowing in a disguised form” with LGFVs. New rules, however, allow some local governments to borrow directly, making the process more transparent.

Experts also want reforms to the tax distribution system and better disclosure.

Xiaolei suggests moving responsibly for some programs, like social welfare, from the local level to higher levels of government. Increasing tax revenues and keeping that money with local governments could also help ease debt loads.

Experts say the risk of China’s local government debt is under control, and much progress has been made in deleveraging and maintaining economic stability. But the Henan provincial government still rejected CGTN’s request for an interview, saying the topic is too sensitive. Looking ahead, concerted efforts and wisdom from both the central and local governments are necessary to solve the lingering problem.