BEIJING -- China will ban localities from taking on additional off-the-books debt while allowing them to issue bonds to meet their funding needs, according to risk management plans the central government announced Thursday.
At the end of August, China revised a budget law to pave the way for debt issuances by municipalities, a fundraising method strictly prohibited until now. Forbidden from turning to the market, cash-strapped governments have sold off state-owned land to make up for budget shortfalls, and turned to financing vehicles that rely on shadow banking to rack up "hidden debts."
According to the National Audit Office, local governments' direct and indirect debt obligations totaled nearly 18 trillion yuan ($2.9 trillion) as of June 2013. Of that sum, 39% was raised through local financing vehicles.
In the plans it laid out that day, China's State Council urged localities to thoroughly track the money borrowed, send status reports to Beijing and publicly release debt figures.
Local governments must take responsibility for their own debt, said the State Council, adding that in principle the central government will not come to the rescue.
Until now, local officials often piled up debt they cannot possibly repay, counting on the central government to bail them out, a practice Hungarian economist Janos Kornai dubs "soft budget constraint."
While this marks a first step in Beijing's effort to tackle shadow banking, local governments are allowed to issue bonds only within the limits set by the State Council. For chronically cash-hungry localities, weaning themselves from real estate deals will not be easy.