(Yicai Global) March 16 -- China will strictly control local government debt this year, financial experts told Yicai Global, following calls to focus on the issue at the just-concluded Two Sessions, China’s annual policy-setting meetings.

The government work report and the budget report at the National People’s Congress said there must be efforts to prevent local government debt risks this year, especially hidden risks.

The central government “will strictly control the debt risks of local governments this year, given expressions about local government debt management in recent important government documents,” said Wen Laicheng, a professor at the Central University of Finance and Economics.

According to Mao Jie, a professor at the University of International Business and Economics, the central government has proposed new requirements for local authorities to prevent and control debt risks this year.

“More effective measures are needed to steadily and effectively dissolve outstanding hidden debt, and prevent all kinds of false dissolving of government debt,” Mao said.

Mao gave an example. In 2019, the management committee of the Yuxi High-tech Industrial Development Zone in Yunnan province re-categorized CNY433 million (USD62.7 million) of government debt as corporate debt, illegally dissolving the hidden debt burden. The committee has since been held accountable and the issue has been rectified.

“There is a need to separate the hidden debt from private capital, or there will be more risks,” Mao added.

After the recent strengthening of supervision over local government financing vehicles, some authorities began to borrow in a disguised way through local state-owned enterprises or subordinate public institutions. These activities will probably be the next focus of supervision, Mao said.

Compared to regular local government bonds with lower interest rates and relatively long maturity, the hidden debt of local governments has shorter maturity and higher interest rates, along with greater risks and less transparency.

China needs to issue refinancing bonds to replace outstanding government debt that meets regulations but has high interest rates, Wen said. But more hidden debt still needs to be resolved by negotiations between city investment enterprises and financial institutions, and hidden debts bearing high interest rates must be replaced by loans at lower rates and with longer maturities.

In recent years, some city investment companies have reduced their interest burden in this way, Wen told Yicai Global.

Editors: Tang Shihua, Tom Litting