Is China Headed for a Debt Crisis?

The third important consideration is the improving management system for government debts. The Chinese government places high priority on local government obligations and risks, which are also closely watched by the public, domestic and international media. This close scrutiny results in constant reforms to the management system of public debts.

Since 2011, the Ministry of Finance has improved regulations on national and local government debts. Most local governments have launched debt management mechanisms, established debt risk pre-warning systems, set up sinking funds, or arranged budget reserves for bond redemption. Based on the principles of differential treatment and gradual resolution, local governments have taken measures to repay past debts, increase supervision on new borrowing and loan uses, and standardize financing platforms.

It cannot be overlooked that some regional governments are exposed to high debt risks. By the end of 2012, three provincial, 99 municipal, 195 county and 3,465 town/township governments reported direct debt to fiscal revenue ratios above 100 percent. If we include the loans guaranteed by local governments, the figure exceeds 200 percent in some areas.

Multiple measures should be taken to resolve China’s public debt issue. One is to establish standard fundraising mechanisms for governments, improve debt management systems, and also to strengthen taxation and fiscal reforms that clarify the division of administrative responsibilities and finance powers between central and local governments. But most important, China must create greater wealth through economic and social development, and improve government performance so that it has sufficient means at its disposal to solve debt problems.