Can New Budget Law Save the Local Governmental Debts?

On August 31， the Stand- ing Committee of National People’s Congress passed the modified budget law. The coming-out of the law once again placed the local governmental debts lacking clear rights and obligations and standardized management under the spotlight.

When people are intensively watching over the new Budget Law， they are also wondering what changes will happen to the local governmental debts with the new Budget Law. Lou Jiwei， China’s Minister of Finance， said on August 31 that the reform to the budget management system and the standardization of local governmental debts are an important part of the modification to the Budget Law. In his opinion， the modified Budget Law is targeting three problems： how to borrow， manage and return the local governmental debts？

What do the participators of securities market think of the modification to the modification of Budget Law？ On September 9， China International Credit International Ratings Agency （CIC Ratings） commented the new Budget Law like this： “The limited ease of the bond issuance of local governments is an important part of the reform to governmental investment and fundraising and is good for promoting the shift of borrower of governmental debts from the financing platform companies to the local governments.

How New Budget Law Speaks of Local Governmental Debts？

The modified Budget Law will take effect as of January 1， 2015. There are 82 clauses modified this time， including the governmental budget， transfer payment and local governmental debt management.

Lou Jiwei says that the modified Budget Law sets up the debt borrowing and fundraising system based on the issuance of local government bonds. This gives local governments certain rights of borrowing debts and thusly presents a solution to how to borrow （presently， the local governmental debts are borrowed by local governments’ fundraising platforms）. The new law also requires the local governments to apply categorized management and size control of the debts， including various categories of the debts of local governments in the budget management and place them under the supervision of local people’s congress， as well as the higher-level administrative and legislative bodies. This presents a solution to the issue of how to manage the debts. In addition， the new law clarifies the responsibilities of enterprises and governments， offering a solution to the issue of how to return the debts.

In Lou Jiwei’s opinion， the local fundraising platforms are used as a tool to facilitate the local governments’ borrowing through enterprises. This confuses the constitution of debts and the new law has made it clear that the corporate debts should be separated from governmental debts. The government should clarify its need for the support of corporate debts if necessary and the governmental debts should be placed under the budget management. Generally speaking， the modification to the Budget Law is to apply standardized management to the local governmental debt management.

The response of the market to the new law shows that people are expecting positive influence of the new Budget Law on the issuance and management of the local governmental debts. The new Budget Law broke down the limitation on the debt- and fund-raising of local governments. It for the first time presents the legal definition the full-caliber budget while having a limited relaxation of local governmental debt borrowing and fundraising.

All governmental expenditure and income should be included into the budget， including the general public budget， governmental transparent budget， stateowned capital operation budget and social insurance fund budget. In addition， the new Budget Law puts the central government’s idea of transfer payment into practice and put forward the idea of“setting up a regular assessment and exist mechanism”. Eventually， the new Budget Law lists the “setup of a completely standardized， public and transparent budget system” into the purpose of legislation. The budget decision is going to be made more public and transparent through refining the budget compilation contents， standardizing the system of opening the budget and final account and enhancing the supervision of People’s Congress into the budget.

Concretely， the Budget Law has refined definitions and classifications of the categories of budget， highlighted the opening of some important items （local governments’ debt borrowings， spending on public-funded cars， travels and dinners， and governmental purchasing included）， and defined the time， contents and department for the opening of the budget. All these changes could help to increase the transparency of local governmental debts.

How Ratings Agency Thinks of Modified Budget Law？

CIC Ratings believes that the new Budget Law made important breakthroughs in the budget management， supervision and inspection. The establishment of “full-caliber budget” is good for the spending and income beyond the budget， which is an efficient way to keep the problems of irregular charges of the government， illegal embezzlement of public funds and financial corruption.

The ratings agency also thinks highly of the reform to the transfer payment， which it believes has the effect of reducing or even eliminating the abuse of financial funds and “misappropriation of funds for projects”. In addition， the improved part of the new law consummates the preliminary inspection system and supervision， good for exerting the function of Congress at different levels as the supervisor of the budget.

Generally speaking， the relaxation on the issuance of debts by local government is an integral part of the reform to the government investment and fundraising. Given the fact that China is still in the initial period of local governments’debt borrowing and fundraising， the new Budget Law has set up strict limitation and subjects of bond issuance， examination， utilities and risk control， showing the cautious attitude towards the bond issuance by local governments. However， further improvement is still needed to put the risk control， pre-warning system， emergency handling and accountability into practice.

International ratings agency Moody’s also published a report， thinking highly of the improvement of the transparency， supervision and management of local governmental debts brought by the new Budget Law. The more smooth information flow and the stricter regulation will also prevent the local governments from borrowing from highly-risky channels and lowering its capital cost.

“The modification of Budget Law is an unprecedented case in 20 years and is a significant milestone for China to carry out a more universal financial reform，”Moody’s reported.