State Council Orders Local Governments to Review Debt of Financing Platforms

China's State Council recently issued a circular that requires local governments to make an overall review of the debts of their financing platforms.

Debts held on the books of such financing platforms exploded last year during the rush to raise funds for various local government projects that received the go ahead during the roll-out of the country's 4-trillion yuan stimulus package and which required local funding to match that put forward by the central government.

These local financing platforms are government-backed investment companies through which provincial, municipal and county governments are able to raise money to fund a variety of projects.

According to the circular, local financing platforms with delinquent accounts, or debts that were formed by way of direct borrowing or debt guaranteed by a third-party guarantor will all be placed under review.

Local governments should define the type of debt held by their financial platforms according to the following three categories:

Debts formed by financing platforms to finance public welfare projects and to be paid off with fiscal revenue.

Those formed by financing platforms to finance public welfare projects but to be paid off by the revenues sourced from the project itself.

Debts formed by financing platforms to finance the non-public welfare projects.

According to the circular, local financing platforms have been ordered to stop financing public projects which rely on fiscal revenue to pay off any debts incurred.

In addition, local governments are prohibited from providing any guarantees that contravene regulations on behalf of these financing platforms.

Local governments have until the end of the year to submit reports on their financing platforms to the State Council.

The State Council has also required the China Banking Regulatory Commission (CBRC), to make an overall review of the loans lent to local financing platforms and safeguard the security of local government assets.

According to data released by the CBRC, by the end of 2009, the amount of debt owed by local governments' financing platforms had registered a year-on-year increase of 70.4 percent to 7.38 trillion yuan.

Goldman Sachs estimated that by the end of 2009, the total debts assumed by both central and local government reached 15.7 trillion yuan, which accounted for some 48 percent of the country's GDP.

This article was edited by Paul Pennay