Should Chinese Local Governments Be Allowed to Issue Bonds?

I.IntroductionDespite China’s impressive economic growth,its fiscal sustainability has increasinglybecome one of the most watched risk indicators facing the economy.Although China’sexplicit national debtto GDP ratio israther manageable by theOECD standard,at about20 percent of GDP,given its small share of tax revenue to GDP,currently at18.5percent ofGDP,this fiscalsystem may stumble upon major challenges in themedium to long term ifChina’slargecontingent fiscal liabilitiesare als…

Should Chinese Local Governments Be Allowed to Issue Bonds?

Thispaper shows thatjust banning localgovernmentsfrom issuing debtshasnot eliminated thelocal government debtin many Chinese provinces. The paperthen advocates that local governments should be allowed to issue bonds, but subjectto some stringent fiscal rules. These fiscal rules should include a balanced-budget rule and a debt limit rule, similar to those already in place among the US states. Furthermore, such rules can only be made effective if theyare accompanied byparallelinstitutionalbuildingeffortssuch astransparent budgetprocessand budgetinstitutions,independentcreditrating agencies, properaccounting andauditing process, andotherinter-governmentalagenciesaimedatalleviatinginformation asymmetry of local government finances. Our domestic currency ratings indicatethat all Chinese provinces possess basic creditworthiness that will enable them to issue domestic currency bonds.