Changes to Budget Law May Result in Local Governments Being Allowed to Issue Bonds

Published: 2010-06-08

News, page 4, issue 467, Apr 26, 2010
Translated by Tony Liu
Original article:

Chinese local governments may soon be allowed to issue local treasury bonds, according to officials and scholars who have seen proposed reforms to China's Budget Law.

In mid-April, the standing committee of the country's National People's Congress (NPC) asked provincial and municipal governments, as well as local people's congresses, for their comments on the amendment to the Budget Law and related seminars have been organized on a local level to deliberate on the proposed revisions to the law.

The EO learned that the revised law clearly states that, after receiving approval from the central authorities, local governments will be able to issue local treasury bonds.

In line with this goal, the next step will involve the Ministry of Finance formulating a system to manage the issuing of bonds on a local level which will take into account issues of scale, debt refunding, risk alerts and the potential budget deficits.

According to existing regulations, local governments are prohibited from issuing government bonds and, up until now, they've been forced to rely on the central government to issue bonds on their behalf.

Some officials and scholars interviewed by the EO argued that reform of the country's Budget Law was not simply a small technocratic change to a set of arcane legal rules, but instead marked a fundamental restructuring of the country's financial system.

They argued that if not passed this time (revision to the Budget Law began back in 2004 and an initial draft version was released in 2006 but not passed), future changes to the country's fiscal and taxation system would be impeded.

The revised Budget Law also clearly states that any move to make changes to a government's budgeted fiscal spending first requires the approval of the National People's Congress or its standing committee and their counterparts at local levels.

According to existing rules, approval is required only when additional spending exceeds 1 percent of the total budget.

At present, few local governments hand over drafts of changes they plan to make to their budget to their local people's congress for examination and approval.

Wang Shibo, vice chairman of Chongqing's Wanzhou District People's Congress standing committee said "At present, there is a big difference between the original budget and how it's finally implemented. Local governments do not follow the rules related to adjustments to budgets and local people's congresses have not held them accountable."

Since 2000, China's central government revenues have exceeded budgetary forecasts by quite a large amount and most of this windfall revenue was spent at the end of the year.

In 2007, the central government's fiscal revenue exceeded what was estimated in the budget by 700 billion yuan, 600 billion yuan of this additional revenue was spent that same year.

However, the central government did not report this additional revenue and outlays to the National People's Congress for approval.

Liu Shougang, associate professor at Shanghai University of Finance and Economics, argues that the revised law still needs improving. For instance, once the government's budget is rejected by its corresponding people's congress, what can the government do next? The law doesn't provide any clear answers.

Liu suggested the law should stipulate a clear procedure and timetable according to which the government can redraft their budget report and then resubmit it to the people's congress for approval.

According to the work plan of the standing committee of National People's Congress, the revised Budget Law will be reviewed in August this year.

The article was edited by Paul Pennay