Compliance is becoming increasingly important for companies operating in China and corporates are advised to strengthen their compliance processes and monitor local government debt policies.

The Corporate Treasurer magazine reports this week that the local government of Ningxiang County, in China's south-east Hunan province, announced on 14 August that it was annulling the guarantees on letters of credit and promissory notes that cover financing for state-owned enterprises (SOEs), issued on or after 1 January 2015. This caused uproar among the businesses affected, to the extent that the Ningxiang County government had to quickly climb down from its position and retract its decision. However, Corporate Treasurer reporter Benny Kung writes that “the fallout could rumble on for some time”

Getting local government debt under control

The move by Ningxiang County is seen as part of Beijing's push to tackle levels of local government debt and to reduce risks associated with lending to corporates or guaranteeing trade loans. China's outstanding local government debt was 15.86 trillion yuan ($2.35 trillion) as of the end of June this year, which is still under this year's 18.82 trillion yuan debt ceiling. Although current local government debt outstanding has increased slightly since the end of 2016, Dow Jones reported that this signals that “risks are under control due to Beijing's efforts to prevent governments from raising large amounts of funds”.

Policy concern

The Chinese government is trying to control and slow down the level of local government debt through several measures including setting debt ceilings for local governments. Local government debt levels have been building up rapidly in recent years, causing significant domestic and international concern. A report from the MIT Center for Finance and Policy at the end of last year underlines China's need for “more stable and transparent financing channels for local governments”. It summarises the situation as follows: “Local governments across China have borrowed substantially in recent years to fund public infrastructure improvements and other capital investments. Local indebtedness has increased dramatically since the global financial crisis of 2008, reaching 40 percent of GDP or RMB 24.0 trillion ($3.8 trillion) in 2014. With an economy growing at its slowest pace since the economic reforms of the 1980s, local debt levels have become a policy concern both within China and internationally. While policymakers have taken steps to mitigate the risks to China’s financial and fiscal systems, further measures may be necessary. Local debt, however, could return to more sustainable levels if the pace of infrastructure investment slows or if more stable funding sources are made available to local government.”

Worries about China's local government have been ongoing for some time. Earlier this year, Bloomberg reported concerns about the local government bond market following a ratings agency downgrade of a Chinese local-government financing vehicle, due to the high debt burden of Jiangsu province.