2nd LD-Writethru-China Focus: China adopts local government debt ceiling

China's top legislature on Saturday imposed a ceiling of 16 trillion yuan (2.51 trillion U.S. dollars) for local government debt in 2015.

The decision was adopted at the close of the National People's Congress (NPC) Standing Committee bi-monthly session.

The 16-trillion-yuan debt consists of two parts, 15.4 trillion yuan of debt balance owned by local governments by the end of 2014, and 0.6 trillion as the maximum size of debt local governments are allowed to run up in 2015.

The 2014 debt balance surged over 40 percent from the end of 2013 H1, and valued 1.2 times of the final accounting of 2014 public budget, according to the statistics.

According to the Budget Law which took effect this year, and a State Council regulation, China should cap local government debt balance, and the size of local government debt should be submitted by the State Council to the NPC for approval.

Wang Dehua, researcher at Chinese Academy of Social Sciences, said the fast expansion of local debt was a result of former inaccurate statistics and the recent proactive fiscal policy as well as major infrastructure projects.

"The move will rein local government debt with law," said Ma Haitao, a professor at Central University of Finance and Economics, suggesting local debt budget shall be submitted to the NPC, and the disclosure system of government debt shall be improved.

The committee also revealed an estimated debt ratio of local government debt as 86 percent this year, within a risk range between 80 percent and 120 percent.

Liu Shangxi, senior researcher at the Ministry of Finance, said the the 86-percent is safe, but some local debt ratio has sharply exceeded the alert level.

Wang also warned of fiscal even financial risks if local government debt is out of control, saying the debt mainly comes from banks which need to be caution about surging non-performing loans.

On Thursday, Chinese Finance Minister Lou Jiwei said China's top legislature has approved the expansion of a debt swap program for local governments in 2015.

The bond-for-debt swap program for local governments will be expanded to 3.2 trillion yuan from 2 trillion yuan. China in March, and then in June, granted a quota of 2 trillion yuan under which local governments could issue new low-cost bonds to replace high-yielding legacy debt.

In addition, new local government bonds worth 600 billion yuan in 2015 was also approved, Lou said, adding that the move will help ease pressure on local governments to pay debts.

The bond-for-debt swap program allows local governments to convert their debt to low interest bonds, a move aimed at easing local governments' debt burden without disrupting the broader economy.

Analysts regarded such program as a relief measure but not a solution, saying that if debt problem cannot be radically solved, long-term risk will become more dangerous.

Wang suggested that priority shall be given to the reforms of local governmental structure and fiscal system. Endi