2013年-IMF国际货币组织全球_Local_Government_Financing_Platforms_in_China_A_Fortune_or_Misfortune__30页_701kb

Summary of Local Government Financing Platforms in China: A Fortune or Misfortune?

Core Content

This IMF Working Paper analyzes the role, growth, and risks associated with Local Government Financing Platforms (LGFPs) in China. It explores how these platforms have functioned as a critical mechanism for financing infrastructure and economic development, but also highlights the growing concerns regarding sovereign risk, banking sector vulnerabilities, and local government fiscal sustainability.

Main Points

I. Introduction

• LGFPs have been a key instrument for local governments to fund infrastructure and stimulate economic growth.
• They act as off-balance sheet quasi-fiscal support vehicles, allowing local governments to borrow indirectly.
• The 2008-09 global financial crisis led to a significant expansion of LGFPs, driven by central government fiscal stimulus and local governments' need to finance projects.
• The paper warns that if the causes of this rapid expansion are not addressed, LGFPs could become a misfortune for the financial system, local governments, and the sovereign balance sheet.

II. Function of LGFPs and Their Relationship with Local Governments

• LGFPs are treated as state-owned enterprises (SOEs) under China's Company Law.
• They are primarily involved in public welfare projects, such as affordable housing, infrastructure, and environmental protection.
• Local governments support LGFPs through budget injections, land use rights transfers, and asset collateral.
• LGFPs are principal financing agents for local governments, as the latter are legally prohibited from direct market borrowing.

III. Rapid Development of LGFPs

• LGFPs experienced rapid growth following the 2008-09 credit expansion.
• They are the reincarnation of 1990s trust and investment companies, which were later shut down.
• The centralization of tax revenue and fiscal stimulus have widened the fiscal gap between local revenues and expenditures.
• By mid-2009, over 3,800 LGFPs had been established at various administrative levels.
• As of end-2010, total local government debt was RMB 10.7 trillion, with LGFP debt accounting for RMB 4.97 trillion (about 46% of total debt).
• Land sales revenue has been a major source of financing for LGFPs, but this is becoming increasingly unsustainable.

IV. Risks and Vulnerabilities

A. Local Government

• LGFPs have created a significant debt burden for local governments.
• In 2009, the ratio of debt to financial resources reached 364.8% for some local governments.
• Debt in the eastern region accounted for 55% of total local government debt, while middle and western regions accounted for 22% and 23%, respectively.
• Interest payments on LGFP debt amount to about RMB 320 billion annually, which is 6% of local government revenue (excluding land sales).
• In Tianjin, the ratio of LGFP loans to transfer-adjusted revenue was 11:1, indicating a long-term repayment risk.

B. Banks

• LGFPs account for 15% of corporate loans by Chinese banks at end-2010.
• Medium- to long-term loans to LGFPs made up 61.2% of total bank loans in early 2011.
• The non-transparency of local government finances increases uncertainty for banks and rating agencies.
• Collateral (especially land) is heavily relied upon by banks, which limits their ability to assess credit risk effectively.
• If LGFPs face defaults, the NPL ratio for banks could increase significantly.

C. Sovereign Risk

• LGFPs could trigger a financial crisis and sovereign risk if their debts become unsustainable.
• The central government may be forced to bail out LGFPs or local governments, increasing contingent liabilities.
• Sovereign balance sheet data shows that contingent liabilities due to NPLs reached RMB 4.2 trillion in 2010.
• The procyclical behavior of LGFPs and the overreliance on investment could lead to economic volatility and financial instability.

V. Policy Suggestions

• Address revenue and expenditure mismatches at the local level.
• Establish a comprehensive regulatory framework to supervise local government budgets and financing.
• Ensure the sustainability of land capitalization, as land sales are a major source of repayment.
• Develop local government bond markets and promote financial reforms to reduce reliance on LGFPs.

Key Information

• Total LGFP debt as of end-2010: RMB 4.97 trillion (about two-thirds of total local government revenue and central transfers).
• Land sales revenue has been the primary source of repayment for LGFPs.
• Fiscal gaps have widened due to centralized taxation and fiscal stimulus.
• Interest burden on LGFPs is substantial, amounting to RMB 320 billion annually.
• Regional disparities in debt burden are significant, with the eastern region bearing the largest share.
• Banks have increased exposure to LGFPs, with NPL risks rising if LGFPs default.
• Sovereign risk is elevated due to contingent liabilities and potential bailouts.
• Local government bond markets are seen as a solution to reduce sovereign risk and financial dependence on LGFPs.

Conclusion

• LGFPs were a fortune for China's local governments in the past but could become a misfortune if not properly managed.
• Market-based discipline, cooperative arrangements, rule-based controls, and administrative reforms are needed to ensure long-term fiscal and financial stability.
• The sustainability of the land capitalization process and the development of local government bonds are critical for reducing contingent risk and sovereign exposure.