Local Government Financing Platforms in China: A Fortune or Misfortune?
IMF Working Papers, December 16, 2013
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- Local Government Financing Platforms in China: A Fortune or Misfortune?
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Bibliographic details
- Authors: Miss Yinqiu Lu, Tao Sun
- Published: December 16, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475599671.001
Summary
- China’s rapid credit expansion in 2009–10 brought local government financing platforms (LGFPs) into the spotlight.
- The paper discusses LGFPs’ function, reasons behind their recent expansion, and risks they are posing to:
- the financial sector,
- local governments, and
- the sovereign balance sheet.
- Central argument: LGFPs were a fortune for China in the past, but would turn out to be a misfortune if the causes of the rapid expansion of LGFPs are not addressed promptly.
- Proposed ways to avoid misfortune:
- acknowledging and addressing the revenue and expenditure mismatches at the local government level;
- establishing a comprehensive framework to regulate and supervise local government budgets;
- ensuring the sustainability of the financial resources obtained from the sale of land use rights;
- developing local government bond markets and promoting financial reforms.
Key findings and risks
- LGFPs expanded rapidly following the 2009–10 credit expansion.
- Risks identified include pressures on:
- the financial sector,
- local government fiscal positions, and
- the sovereign balance sheet.
- The paper emphasizes the conditional nature of LGFPs’ value: beneficial historically, potentially harmful going forward if underlying causes are unaddressed.
Policy recommendations
- Acknowledge and address revenue and expenditure mismatches at the local government level.
- Establish a comprehensive framework to regulate and supervise local government budgets.
- Ensure the sustainability of financial resources derived from the sale of land use rights.
- Develop local government bond markets.
- Promote financial reforms.