China prevents emergence of new local government hidden debts

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"The current risk on local government debt is generally controllable and no new local government hidden debt is allowed," Liu Kun, China's minister of finance, told a press conference on the sidelines of the second plenary session of the 13th National People's Congress in Beijing on Thursday.

The debt balance of local governments stood at 18.39 trillion yuan (about 2.74 trillion U.S. dollars) at the end of 2018, well below the official ceiling of 21 trillion yuan, official data showed.

Liu said that the Chinese government's debt balance was 33.35 trillion yuan, and the government debt ratio was 37 percent, far below the European Union's 60 percent warning line and lower than the level of major market economy countries and emerging market countries.

Liu noted that some debt-raising practices of local governments have bypassed the legal framework.

He said China is "very serious" about hidden debts, and prohibits debt-raising practices that disregard solvency. He added that the Ministry of Finance has taken strict measures to prevent the emergence of new local government hidden debts while demanding a steady resolution of existing debts.

By the end of February, local governments issued a total of 307.8 billion yuan of special bonds.

The average interest rate on new bonds issued in January was about 55 basis points lower than the average bond rate in 2018. The average bond maturity for newly issued bonds is seven years, one year longer than in 2018.

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The government's fiscal deficit target has been set lower than expected as Liu said China's fiscal policy doesn't mean opening a floodgate for stimulus.

Fiscal stimulus is the primary focus for China in 2019, from the bigger than expected Value-Added Tax (VAT) cut for manufacturers to an increase in the fiscal deficit target. But as downward pressure on the economy builds up, the question is whether that fiscal deficit target is aggressive enough.

“We raised the requirements on profits submitted by certain state-owned financial institutions and companies. We also asked local governments to diversify the ways to boost their finances. That allows us to not raise the deficit target too high,” Liu added.

This round of economic stimulus puts manufacturing and small businesses on top. The goal is to spur companies' capital spending to buy new assets and expand their businesses for more economic vitality.

(CGTN's Xia Cheng also contributed to the story.)