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Top Chinese legislators, in a effort to help finance the $586 billion stimulus package, may allow local governments to issue bonds.

Top Chinese legislators, in a effort to help finance the $586 billion stimulus package, may allow local governments to issue bonds.  If this proposal is passed, it will mark the end of a decade-long debate regarding whether or not local governments should be allotted more fiscal responsibility, despite the large debts they have amassed over the years.  How to correctly supervise the debt issuance is still in question.

Caijing, a Chinese magazine, reported that “the central government would allow local governments to issue bonds up to 200 billion yuan this year”.  This would coincide with the government issuing 750 billion yuan treasury bonds expecting a budget deficit of 950 billion yuan, a record deficit nine-times that of 2008.

The $586 billion stimulus package was meant to be financedone-third by the central government and two-thirds by local governments, banks and private investors.  However, local governments have little fiscal surplus to pay off their portion of the package due to a decrease in land sales.

Currently, local governments cannot legally issue debts directly. Through State-backed investment arms, many have circumvented a path to acquire credit and issue debts.  Zhao Quanhou of the Research Institute for Fiscal Science under the Ministry of Finance stated:

“The proposal to loosen the limits is part of a long-term reform, rather than a measure to finance the nation’s stimulus package.  Presently few local governments will likely want to resort to it, given the proposal’s rigid requirements.”

Local governments must reveal the status of their debts and revenues in order to issue bonds directly.  Considering that the total debt held by local governments is estimated at over 1 trillion yuan, or roughly 4 million yuan for each of the township-level governments,  many of them will not be able to receive loans in order to issue bonds. 

Ma Yu, a senior researcher with the China Society of Economic Reform, stated that “Government revenue is already more than enough now.  The money they already had hasn’t been spent well. So why bother to issue debts?”. 

The government spent more than 900 billion yuan on overseas tours, vehicle use and dining each year,
criticized Zhu Lijia, a researcher with the China National School of Administration.

The government should critically regulate any unnecessary spending. Nevertheless during times of economic instability, alternative measures, including giving more responsibility to the local governments, should be implemented in order to resolve the crisis.

Source: www.AsiaEcon.org
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Source: www.asiaecon.org |

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