China Pledges to Tackle Local Government Debt Amid Reform

China’s leaders pledged to tackle local government debt next year while creating a stable economic and social environment to promote reforms.

The government will maintain continuity and stability in its macro-economic policies in 2014 and stick to a prudent monetary policy and proactive fiscal policy, China Central Television reported, citing a statement from the annual Central Economic Work Conference that ended yesterday.

President Xi Jinping and Premier Li Keqiang are grappling with a surge in local-government debt, risks from shadow banking and environmental degradation as they implement reforms unveiled after a Communist Party summit last month. The conference, held to map out economic policies for next year, concluded that the nation should seek “reasonable” growth in gross domestic product, without giving a target.

“Judging from the wording, it is more likely that next year’s GDP target will be set again at 7.5 percent rather than 7 percent,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “The main risk identified next year is the local government debt but policy makers appear to be determined to prevent it from being realized.”

‘Important Task’

This year’s meeting, attended by the top party leadership and government officials, ran for four days compared with two days last year and three days for the years from 2008 through 2011. Xi and Li both made speeches, according to yesterday’s CCTV report.

“We must take controlling and addressing local government debt risks as an important task in economic work,” according to a statement from the conference read out on CCTV’s main evening news bulletin. Provincial-level governments will be held accountable for local debt, it said.

Last year’s meeting produced a statement that China will aim for a higher “quality and efficiency” of growth, instead of the “relatively fast” pace sought since 2006, a signal that leaders would tolerate slower expansion than the average pace of more than 10 percent a year over the past decade.

China will try to achieve a growth rate that will improve the quality and efficiency of development and won’t lead to any “hangovers,” according to yesterday’s statement. The government will aim to stabilize expansion, restructure the economy and promote reforms, it said.

Supportive Policies

The three goals “hinted that growth is still the priority of the central government,” Hu Yifan, Hong Kong-based chief economist at Haitong International Securities Group Ltd., said in a research note. “More supportive policies are expected to ensure social stability as increasing unemployment in a decelerating economy has become a rising concern.”

Hu said she expects next year’s growth target to be set at 7.2 percent to 7.5 percent, with an actual expansion pace of 8 percent, led by a new wave of infrastructure investment, 4G network and environment related projects, and recovering domestic consumption.

This year’s goal for GDP growth is 7.5 percent, the same as in 2012. An annual target of 8 percent was in place from 2005 to 2011 and it was 7 percent in 2004. Premier Li said in October that China needs annual expansion of 7.2 percent to keep unemployment stable, after indicating in July his “bottom line” for expansion was 7 percent.

The State Information Center, a government research institute, said China may set next year’s target at 7 percent, the Economic Information Daily reported Dec. 3, citing an annual report from the organization. The state-run Chinese Academy of Social Sciences also believes the goal will be set at 7 percent, the newspaper said.

‘Slow Recovery’

Leaders warned of “downward pressure” on the economy, citing overcapacity, a deteriorating environment and food-quality issues, according to the CCTV report. The global economy will continue its “slow recovery” next year, with uncertainties and instability stemming from a lack of new growth engines and the monetary policies of “major countries,” it said.

China has said since 2008 that it’s implementing a “proactive” fiscal policy and started saying in 2010 that it’s following a “prudent” monetary policy.

The government’s labels for its policies are sometimes altered after changes have happened. For example, China started raising interest rates in 2010 before dropping its “moderately loose” stance of monetary policy.

Rising Liabilities

“In our view, the fiscal policy stance in the past two years can be described as being prudent,” said Chang Jian, China economist at Barclays Plc in Hong Kong. “We think the central government continues to face challenges in maintaining medium-term fiscal sustainability as fiscal revenue growth fell sharply while debt and contingent liabilities are rising.”

The State Council led by Li ordered a nationwide audit of local authorities’ debt in July, underscoring concern that borrowings by thousands of companies set up by regional governments to fund infrastructure projects have increased risks in the financial system. A document issued after the Communist Party’s summit last month said that debt will become one of several criteria used to rate local officials.

While the National Audit Office has yet to release the results of its review, Caijing magazine reported this week that local government debt may be about 15 trillion yuan ($2.47 trillion) to 18 trillion yuan, based on a forecast in March by the agency’s deputy director. That compares with an end-2010 total of 10.7 trillion yuan given in an audit office report in June 2011.

Urbanization Process

Although the statement from the economic works conference didn’t refer to urbanization, which Li has described as a growth driver for China, a separate government meeting on the topic took place in Beijing today, China National Radio reported.

The meeting, also attended by Xi and Li, concluded that China’s urbanization process should focus on the market’s role in development, prioritize registration and integration of rural migrant workers, and focus on reducing pollution and impact on the environment, according to the radio report.

The government will next year keep “reasonable” growth in credit and aggregate financing, the country’s broadest measure of funding in the economy that includes bond and stock sales, according to yesterday’s statement reported by CCTV.

Boosting Employment

Other tasks include ensuring the security of grain supplies and agricultural products, changing the industrial structure including resolving overcapacity issues, coordinating development between different regions, boosting employment and increasing the construction and supply of public housing, according to the statement.

The country will continue its opening up policy, accelerate negotiations for free trade and investment agreements and simplify approvals for outbound investment. The government should also promote the construction of the Silk Road economic belt, it said.

“While the statement suggests reforms in several areas in 2014, it does not indicate major movement next year on key, but politically thorny areas such as reform of the fiscal system, rural land arrangements and state-owned enterprise issues,” Louis Kuijs and Tiffany Qiu, Hong Kong-based economists with Royal Bank of Scotland Plc, said in a note.

— With assistance by Scott Lanman, and Xin Zhou

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