Executive Summary:The overall risk of local ** debt is controllable, which is the overall judgment of local debt risk. The overall manageability shows that we have the ability to deal with local** debt risks, but if effective responses are not taken, risks can also turn into crises. Therefore, the key to preventing and resolving the risk of local debt lies in formulating and implementing a package of debt reduction plans. This article proposes the principles that should be followed in the debt package.
On August 28, 2023, Liu Kun, Minister of Finance, was entrusted by the Standing Committee of the 14th National People's Congress at the fifth meeting of the Standing Committee of the 14th National People's Congress to make a special explanation on how to prevent and resolve local debt risks. The issue of local government debt has always been of great concern. The overall risk of local ** debt is controllable, which is the overall judgment of local debt risk. Obviously, the prevention and resolution of local debt risks cannot stop at this judgment. The overall manageability shows that we have the ability to deal with local** debt risks, but if effective responses are not taken, risks can also turn into crises. Therefore, the key to preventing and resolving the risk of local debt lies in formulating and implementing a package of debt reduction plans.
Local debt risk is a concentrated embodiment of fiscal, financial, and economic system risks
Local ** debt risk is first and foremost a local fiscal risk. As long as the local government can repay the debt when it is due, then there is no risk of local debt. Whether the local ** debt can be repaid when due depends on the disposable financial resources of the local ** and the local financial operation.
The operation of local finance is a dynamic issue, which needs to be understood from both expenditure and revenue in light of the actual situation. From the perspective of expenditure, the "three guarantees" at the grassroots level (ensuring basic people's livelihood, wages, and operation) are the bottom line. With the development of the economy, the people's demand for high-quality public services is becoming more and more intense, and the corresponding expenditure will increase, and at the same time, the expenditure is rigid to a large extent, and the reduction of expenditure, especially for people's livelihood, is easy to cause other problems.
From a revenue perspective, general public budget revenues, especially tax revenues, are the most important. The main form of income in the modern state is taxes. In addition to the tax revenue at the same level, there is also a part of the disposable financial resources from the higher level and even the financial transfer payment, and the transfer payment funds mainly come from taxes. Over the past 20 years, many localities have received income from development funds, the most important of which is the income from the transfer of state-owned land use rights. Land revenue is the most flexible disposable financial resources of the local government, and it is closely related to special bonds, local financing platforms, and local hidden debts. In recent years, the risk of local government bonds has been prominent, and the continuous decline in land revenue is one of the main reasons.
Ultimately, both expenses and income are linked to debt management. As far as the general debt corresponding to the general public budget revenue and the special debt corresponding to the ** budget revenue are concerned, the debt information required for debt management is complete, and the risk of this part of the debt is small. Debts that are free from the general public budget and the ** budget may be converted into local ** debts, that is, hidden debts, which are difficult to manage and the amount of debts is not clear. In reality, the risks of this part of the debt are easily exaggerated. When talking about liabilities, it must also be said that assets, liabilities and assets have a corresponding relationship, and assets are converted into income that can be used to repay debts. It is also not easy to say to what extent implicit debt will be converted into direct debt of the local government.
Theoretically, as long as the revenue and expenditure of each budget are in normal operation, there will be no major problem with the risk of local debt. The detachment of implicit debts from budget management is a manifestation of problems in budget management. If such a debt is not a ** debt, it can only be borne by the market entity itself; If it is a ** debt, then the relevant responsible person in the budget management must be held accountable for the negligence of duty, because the debt information is not reflected in the budget. Fully grasping the information of implicit debt is one of the prerequisites for resolving debt risks. No one can cope with the risk of unclear debt fundamentals, and it is a debt risk that is likely to continue to grow.
The risk of local government bonds is also a financial risk. Local debt financing is mainly financial institutions, and implicit debt is even more so. China's financial structure is still dominated by indirect finance, and commercial banks provide a large amount of funds for local governments, so once the risk of local debt is transformed into a crisis, financial institutions will not escape the doom. In this sense, the risk of local government bonds is a financial risk. It is necessary to analyze the problem from the perspective of financial stability and the sustainable operation of financial institutions, and choose the way to solve the problem. Financial institutions are typical high-debt enterprises, and high leverage does not mean that there will be problems, but we cannot ignore the objective existence of risks. As long as the risk does not turn into a crisis, the financial institution may be able to function normally. The risk of local government bonds may impact the normal operation of financial institutions, which may bring financial risks and even financial crises.
The risk of local government bonds is a reflection of the risk of the economic system. Although the funds of local government bonds mainly come from financial institutions, the funds still fundamentally come from various economic entities in society. If there is a systemic problem in the economy, some economic entities that could have been operating normally may not be able to operate normally. If there is a problem in the economy, local fiscal revenues will be affected, which will have an adverse impact on debt repayment. To deal with systemic risks in the economy, we fundamentally rely on high-quality economic development. If the economic system is running healthily, the probability of local debt risks will be greatly reduced. Local debt is mainly domestic debt, which is an extremely favorable condition for turning debt, but local governments cannot simply push debt risks to society, because this may cause unnecessary economic risks. Therefore, to resolve the risk of local ** debt, systematic thinking is required to deal with complex problems.
Develop a general understanding of the debt package
To develop a debt package, the goal cannot be to cover all debts at a certain level** or a certain department. The purpose of debt is to make the debt run smoothly and the debts that are due can be repaid, so as to achieve the stability of the bond market, promote the stability of the financial market, make financial risks preventable and controllable, and achieve the stability of financial operation.
Turning into a debt does not mean paying off all debts immediately. Paying off all debts is not only impossible, but also unnecessary. There is a pattern to the emergence of local government bonds. Under the conditions of a market economy, local finance is relatively independent under the unified leadership of finance, and the essence of the fiscal management system of the tax-sharing system is hierarchical finance. In this way, it is normal for local finances at all levels to run the situation of not offsetting expenditures, and in line with this, local finances need to adjust the surplus of funds in different years, and need to supplement the funding gap in specific years through debt financing. As long as the scale of local government bonds is within a certain limit, local bonds can operate normally, and debts due can be repaid in a timely manner, the operation of local bonds will be normal. The most direct goal of the local debt risk discussed now is to prevent the risk of local debt not operating normally.
The risk of local government bonds needs to be gradually eased. Debt risks are gradually accumulated, and the prevention and resolution of risks must be a gradual process. To prevent and resolve risks, it is necessary to guard against new risks caused in the prevention and resolution of risks. Breaking the existing debt ecology without creating a new alternative debt sustainability solution will inevitably bring new risks. The puncture of the economic bubble needs to consider the consequences. This is true for the economy, and so is debt risk. There are many economic agents in the debt ecosystem, and whether these economic agents are ready and have the ability to adapt to the new debt ecology need to be considered. The market is effectively combined with the best in the world, so that the market players and the market players can perform their duties and play an effective role. Debt involves local governments and various departments (especially local financial departments), financial enterprises, local enterprises, people and other economic entities, and it is necessary to formulate appropriate plans to reduce the possible losses of commercial bank depositors and various investors. The debt swap and restructuring of the financing platform company may bring some losses to the relevant economic entities.
Debt resolution requires concerted action, and at the same time, it must be accompanied by individualized and specific solutions. In recent years, local financial operations have encountered some problemsThe direct reason is mainly that the growth of local fiscal revenue is weak and the rigidity of local fiscal expenditure is strong, resulting in greater pressure on local fiscal operation. Some special bond projects do not have corresponding income, and it is difficult to repay the special bonds after maturity in the future based on the cash flow generated by the project itself. The performance of different local finances in these problems is different, and it can be said that there is a trend of differentiation in the operation of local finances, and correspondingly, the risk of local debt is also different. Generally speaking, compared with the relatively backward places with the economy, the scale of the debt is larger, but the ability of the developed places to deal with the debt risk is also stronger, therefore, in the debt, the debt risk of the local government cannot be judged simply by the size of the debt, otherwise it may mislead the subsequent decision-making. Only by adapting measures to local conditions and choosing the appropriate debt solution can we effectively prevent debt risks and minimize the cost of debt reduction.
It is necessary to highlight the responsibilities of local governments at all levels. This is highly consistent with the strict implementation of the requirement that "the province bears the overall responsibility, and the local party committees at all levels and the local party committees bear their own responsibilities". To develop a personalized and specific plan, it is necessary to have sufficient local ** debt information, and there is no place to obtain the most adequate information **. The provincial level is responsible for the overall responsibility, and can better coordinate the debt risk prevention work at all levels within the provincial administrative region. Local party committees at all levels and the local party committees at all levels are responsible for their own responsibilities, which embodies the work requirement of "whose child is taken away" in the debt. The main body of debt borrowing should bear the main responsibility, which is consistent with the main body of local government debt. The borrower has the most basic information on the local debt risk and is in the best position to propose a personalized debt plan. Moreover, it can also prevent the problem of soft budget constraints from arising. The main borrowers here refer to cities and counties. The provincial level is only responsible for the situation that the city and county cannot prevent and resolve the risk, that is, the general responsibility of the provincial level is the responsibility of the local debt and the last line of defense for the local debt risk.
Debt reduction requires financial guidance and support. ** The government actively supports local governments to do a good job in resolving hidden debt risks and creates a better environment for local governments to turn into debts. In terms of financial support, the first financial department through transfer payments, do a good job in the grassroots "three guarantees" work, and help the local financial operation. In 2023, ** fiscal transfer payments will reach 1006 trillion yuan, to ensure the smooth operation of grassroots finance. 1-7 months has been issued 925 trillion yuan. In addition, the financial support is also reflected in various supportive policy measures. No matter how it is supported, it will not change the main responsibility of the local government in the debt.
The idea of a debt package
The finance sector plays the most important role. From a practical point of view, it is impossible to raise sufficient funds for debt conversion by relying solely on the financial resources provided by general public budget revenues. Therefore, it is necessary to give full play to the role of the fiscal department in coordinating financial resources. Finance is the foundation and important pillar of national governance. **All kinds of funds, assets, and resources may and need to be coordinated. In order to give full play to the role of the financial sector in the governance of the country, it is necessary to ensure that all revenues and expenditures, assets and liabilities are within the scope of financial governance.
The Ministry of Finance continues to promote the preparation of comprehensive financial reports, and the local balance sheets have long been trial, but they have not been published. Now is the time to make the most of this report. The balance sheet of the local government reflects the assets and liabilities of the local government more comprehensively, and together with the budget revenue and expenditure statement, it more comprehensively reflects the asset-liability ratio of the local government and the assets and resources that can be coordinated. To build a comprehensive financial reporting system, it is not only necessary to speed up the preparation and disclosure of the balance sheet, speed up the preparation of cash flow statements, income and expense statements, etc., but also strengthen the analysis of financial statements and provide information such as notes to the statements. This work is not only necessary for the prevention and resolution of short-term local government bond risks, but also an institutional arrangement, which needs to be regulated in an institutionalized way. In short, it is necessary to organically combine the construction of the first comprehensive financial reporting system with the prevention and resolution of local debt risks, and in the short term, the first balance sheet that has been tried but not yet disclosed should be used in the actual decision-making of the formulation of local specific debt plans, and create conditions for disclosure as soon as possible.
Do a good job in the coordination of local departments. The use of all kinds of funds, assets and resources by local finance involves not only the financial sector, but also other departments should do a good job of cooperating. Funding pooling is related to all the best sectors that use financial funds. The tax department, the SASAC system, and the natural resources management department are directly related to the overall utilization of funds, assets, and resources.
Only by coordinating various departments can we truly coordinate local direct debts and hidden debts. Even if it is a hidden debt, it is not necessarily all converted into direct debt of the local government. Implicit debt is in many cases in the form of contingent liabilities that require certain conditions to be met in order to be converted into direct debts. Therefore, to coordinate direct debt and implicit debt, it is necessary to determine the probability of implicit debt being converted into direct debt, and the implicit debt after conversion can be added together with direct debt to obtain the total debt burden of local **.
Develop operational criteria for debt screening. The resolution of local implicit debt risks is the top priority of local debt risk resolution, and it is the most difficult. To this end, it is necessary to clarify the actual amount of implicit debts on the premise of setting reasonable standards. Local implicit debt is not equal to the debt of local financing platforms, let alone the debt of local state-owned enterprises. Local state-owned enterprises operate in the market and are inherently legal persons, and there is no reason to directly count the debts of enterprises as the debts of local enterprises. Even if it is a local financing platform, the debt of the platform company cannot simply be regarded as the debt of the local **. Platforms also exist in the form of companies, but with specific tasks. In reality, platform companies may operate well because of their legal operations; or failing to operate normally and falling into trouble, including debt distress. Even if the former is in debt, it can be repaid at the company level, and it is impossible to become a debt of the local government; The liabilities of the latter may be converted into local ** debts, but considering the company's own assets and the autonomy of the company's operations, the company's debts may only be partially converted even if they are to be converted into local ** debts. Therefore, in any case, the debts of local state-owned enterprises cannot be regarded as local ** debts, nor can the debts of local financing platforms be directly equated with local ** debts.
Local** issues refinancing bonds to optimize the maturity structure and reduce the interest burden. The unreasonable maturity structure is an important factor in the formation of local debt risks. Doing a good job in optimizing the maturity structure of debt and replacing short-term debt with debt that is consistent with the investment return cycle of special bond projects can effectively prevent and resolve the risk of special bonds; Relying on the availability of debt repayment funds and the future fiscal revenue, short-term debts will be replaced with more reasonable medium- and long-term debts. The optimization of the debt maturity structure does not mean the elimination of local debt. In doing so, it only further enhances the sustainability of local ** debt. The interest rates on some local debts that have already been formed are on the high side, which has increased the burden of local debts. It is necessary to closely coordinate and cooperate with the monetary policy to return the interest rate of local bonds to a reasonable level. Converting some non-standardized loans with higher interest rates into local** bonds with lower standardized interest rates can reduce the interest burden of localities.
Through market-oriented means, we should give better play to the role of financial institutions in the transformation of debts. Commercial financial institutions act in accordance with the laws of the market, otherwise it will be difficult for them to survive, let alone develop. The key to the governance of local debt is to make local debt sustainable. Commercial financial institutions may postpone or switch certain loan methods to create new opportunities for local financing, provide the possibility of future debt repayment, and achieve the sustainability of local debt. This is mainly due to the fact that if the risk problem of local government bonds cannot be solved, commercial financial institutions will be unable to protect themselves.
Debt should be organically combined with high-quality economic development. Development should be given prominence to the conversion of debts. The time-for-space strategy in debt conversion is not only reflected in debt swaps, but also development can provide greater space for debt resolution. Local government bonds are not a beast of the flood, but a reasonable scale of local bonds can promote economic development, thereby providing more adequate funds for debt repayment. Economic development comes first. Without economic development and high-quality economic development at a certain rate, various short-term debt measures will eventually fail. Only by accelerating development and achieving sustainable and high-quality development can the economic foundation for the prevention and resolution of local debt risks be consolidated. In addition, the size of the debt will be easier to cope with over time.
The selection of the steps to resolve debts should give full consideration to the ability of local governments to repay debts. The ability to pay debts is dynamically changing, and local economic development will promote the improvement of local debt repayment capacity. The problem of debt risk is fundamentally to be solved by development. This cannot be done down the old path of developing real estate. The formation of a country's economic competitiveness cannot be mainly based on real estate. The high-quality development brought about by scientific and technological progress is what is really needed. It is necessary to solve the debt problem in the context of development. What appears to be a high level of debt for a period of time may shrink over time. As the economy develops, what seems to be a lot of debt at one stage is "not a problem" at another. Only by focusing on high-quality development can we provide the most solid support for the prevention and resolution of local debt risks.
In the end, the results of debt reduction must be guaranteed by a reasonable local debt formation mechanism. To prevent and resolve the risk of local ** debt, it is necessary to deal with the relationship between stock debt and incremental debt, and form a reasonable mechanism for the formation of local ** debt. In any case, the local government should not increase unreasonable debts, including implicit debts, while reducing debts. If the incremental problem is not solved, the stock problem will not be solved even if it is solved. Therefore, there must be a reasonable local ** debt formation mechanism. Such a mechanism does not come automatically.
On the one hand, it is necessary to strengthen cross-departmental joint supervision. The issue of local government debt is both a fiscal and a financial issue, and it is also closely related to other departments. Only by forming a long-term regulatory framework through cross-departmental joint supervision can we continue to manage hidden debts more accurately and effectively. On the other hand, it is necessary to scientifically and rationally determine the authority for issuing local government bonds. To implement the quota management of local government bonds, it is necessary to properly implement the basic requirement of quota management, that the number of bonds to be issued is no longer specified within the quota, so as to achieve real quota management. At the same time, efforts should be made to create conditions for local governments to issue bonds on their own. The local people's congress should play a positive role, and the ideal state is that even if the local government is free to issue creditor's rights, the responsible and constrained localities do not necessarily issue bonds.