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Lou Says China Should Let Local Governments Default on Debt

  • ‘They need to shoulder responsibility,’ Lou Jiwei tells forum
  • Comments echo those by Premier Li, other government officials

Former Finance Minister Lou Jiwei said China should allow smaller local governments to default on debt because it would signal that central government bailouts aren’t assured.

Such defaults would educate investors that their investments will be allowed to go bad, Lou said Friday at a public finance forum in Beijing. "They need to shoulder responsibility," said Lou, who’s now chairman of the country’s social security fund. "Nobody will save them."

Lou Jiwei. Photographer: Andrew Harrer/Bloomberg
Lou Jiwei.
Photographer: Andrew Harrer/Bloomberg

Lou’s comments reiterate those by Premier Li Keqiang and other central government officials such as current Finance Minister Xiao Jie that local government debt shouldn’t be bailed out, or benefit from assumptions it will be.

With economic growth accelerating for a second-straight quarter to 6.9 percent through March, policy makers have more room to cut leverage and rein in risks. A credit surge since 2014 that underpinned growth has also fueled a further buildup in borrowing. Total debt rose to 258 percent of economic output last year from 161 percent in 2008, Bloomberg Intelligence estimates show.

Lou said government debt remains broadly safe, but borrowing levels are poised to keep climbing given increased investment in substandard public-private partnership projects.

"Financial risks are the most urgent," Lou said. "Small financial institutions are the most vulnerable when monetary policy starts to tighten."

— With assistance by Yinan Zhao

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