More active and effective fiscal policies will be adopted in 2017 according to the keynote set by the Central Economic Work Conference. Journalist of www.cnstock.com learnt that China’s fiscal deficit rate is expected to stay around 3 percent in 2017, but local government bonds will expand moderately in size.
Swap of local government bonds to expand moderately
According to the arrangement of the Ministry of Finance (MOF), 1.18 trillion yuan, 780 billion yuan of which are general bonds and the rest 400 billion yuan of which are special bonds, were newly added to local government bonds, a growth of nearly 100 percent when compared with the figure in 2015. Wang Kebing, deputy head of the Budget Department at the MOF, publicly indicated last year that a debt swap of 5 trillion yuan would possibly done in that year.
Yang Ruijin, deputy head of the Treasury Department at the MOF, recently disclosed that around 6.05 trillion yuan of local governments bonds were issued in 2016, approaching a year-on-year growth of 60 percent. New local government bonds and swap bonds recorded 1.17 trillion yuan and 4.88 trillion yuan, respectively. Stocking local debts were further advanced, and the issuance of swap bonds grew by over 50 percent year on year in 2016. Aggregately, around 8.1 trillion yuan of swap bonds were issued in 2015 and 2016.
Local government bonds tend to be more market-oriented amid large scale of issuance. As introduced by Yang, the market-oriented pricing of local government bonds improved steadily in 2016. The interest rates of local government bonds basically moved in the same direction with the interest rates in the bond market. The average interest rate of publicly issued local government bonds was 13 basis points higher than the yield of government bonds with the same term.
In addition, as an important mark of the marketization of local government bonds, the interest rates of publicly-issued local government bonds became divided in 2016. On the whole, the interest rates of bonds issued in the eastern part of China were lower than that of bonds issued in the middle and western part of China.
The financial work conference held at end 2016 proposed to properly tackle stocking government debts and step up efforts made in swapping stocking debts with local government bonds in 2017. It means that the scale of swap bond will further expand on the basis of 5 trillion yuan in 2016.
For newly-added local government bonds, some experts hold that the deficit rate is expected to be lower than 3 percent in 2017. Based on this, a certain amount of local government bonds will be newly added. For example, the amount of special bonds might be larger than that of previous years.
Li Xuzhang, a professor with the Party School of the Central Committee of C.P.C, told the journalist that “the scale of local government bonds will expand moderately on the whole”.
Prevention and control of risks prioritized
Policies and measures are frequently rolled out to beef up management over the risks of local government bonds since 2016.
The Emergency Disposal Scheme for Tackling Risks of Local Government Debts proposed overall arrangement for the emergency disposal for possible risks of local government debts. A four-level emergency mechanism is set up and the readjustment of local finance will be initiated when necessary.
The MOF released interim methods proposing to make intensified law enforcement and accountability an important tool in reinforcing the management over local government debts.
It can be seen from the work arrangement of the MOF and various places that strict control over the risks of local government debts is still highly prioritized.
According to the requirement of the MOF, more efforts will be made in tackling the violations of laws and regulation in debt financing and the accountability issues in 2017. The market-oriented transformation of financing platform companies will be advanced, and the estimation and alarm of the risks of local government debts will be intensified.
Though the statement varies in the provincial financial budget drafts in 2017, consensus is reached on “preventing and controlling risks”. For instance, Hebei province proposes to “pay great attention to emerging tendency of potential debts, step up the debts management and supervision over key institutions and financing platforms, and practically prevent and control the risks of local government debts”. Gansu province vows to “accelerate the establishment and improvement of the evaluation, alarm, emergency disposal and accountability mechanisms for the risks of local government debts, and strictly prohibit illegal borrowing and guarantee in disguised form”.
Zheng Chunrong, a professor with the Shanghai University of Finance and Economics, indicated that local government bonds and relevant capital management have all been included in budget management, and the risks are relatively low now. The supervision over contingent debts might become an important task in a period ahead. In addition, the transformation of financing platforms is also worthy of attention.
Translated by Jelly Yi
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