By Li Yang
BEIJING, Oct. 9 (Xinhuanet) -- It should be one of the key tasks in the reform in the coming 5-10 years to solve the problem of the mismatch between the central and local governments’ financial and affair authorities to reshape the fiscal relation between them, which will fundamentally weaken the tendency of the local governments to increase their liabilities in various ways and lay the foundation for avoiding the local governments’ debt risk, said Li Yang when he accepted an exclusive interview. Li is the vice president of the Chinese Academy of Social Sciences (CASS) and chief economist of the China Wisdom of CASS.
On the 8th of September, China Wisdom of CASS (a databank and service organization newly set up by CASS) published “China’s Sovereign Balance Sheet between 2000 and 2010” at Beijing. According to wide caliber calculations, China’s net sovereignty assets in 2010 were close to 70 trillion Yuan. According to Li’s analysis, the possibility of China’s sovereign debt crisis is very low in the long term, but the balance sheets of individual entities, including some local governments, will become very unbalanced.
In fact, over the past two years, a “local debt crisis” has been the main reason for western institutions to take bearish bets on Chinese economy, and it has become an issue attracting high attention from all sides how to contain the investment impulse of the local governments.
Li said that the “China’s Sovereign Balance Sheet between 2000 and 2010” -- which he is taking part in compiling -- can be refined to a specific city, and it will give us a clear three-dimensional picture of the issue.
The data shows that China’s state assets increased rapidly between 2000 and 2010. The rapid accumulation of overseas assets, infrastructure and real estate assets were the dominant factors behind the asset expansion. On the liabilities side, the growth of liabilities of the local governments on all levels and the state-owned enterprises was much higher than that of private sector. This highlights the characteristics of the system in which economic activities are dominated by the government.
The period characterized by accelerating industrialization and urbanization has resulted in China’s huge investments, and the funding gap can only be compensated by the government. “Both Industrialization and urbanization take place locally, and we all have to consider the issue of investment,”said Li.“If the problem were not solved, the impulse that the local governments bypass the central government’s management to raise funds would continue in the next years.”
In the situation, in Li’s opinion, it should be a key task for China to reshape the fiscal relation between the central and local governments in its future reform. In order to ease the mismatch between the further urbanization and the serious inadequacy of the financing system for urbanization, it would be necessary for China not only to provide the local governments with new sources of principal taxes and expand the areas of local bond pilots in the process of financial and taxation reform, but also to adopt innovative financial policies to promote commercialization and securitization of utilities projects as well as extension of bank loans, so as to solve the liquidity risk problem which would be the result from the maturity mismatch of the local governments’ balance sheets.
In Li’s opinion, compared to the short risk triggered by the local debt and real estate credit, the long-term risk of the Chinese sovereign asset balance sheet is more concentrated in the external balance sheet, enterprise debt and social security funds debt.
According to Li’s analysis, to avoid the above risks, it is critical to maintain sustained economic growth and promote the transformation of the development mode. In addition to reshaping the fiscal relation between the central and local governments, China also should perform well in the following five jobs:
Firstly, maintaining sustained economic growth is the fundamental way to avoid the debt risk;
Secondly, debt mismatch is a major risk to China’s foreign assets and liabilities structure. As a long-term strategy, China should focus on expanding domestic demand, reducing dependence on external demand and slowing down the accumulation of external assets.
Thirdly, gradually reduce governments’ involvement and intervention in economic activities, and reduce the risk of contingent liability. In order to realize it, the fundamental is to promote market-oriented reform and governmental transformation, change implicit contingent liabilities to a explicit direct liabilities, make debt subjects clear and make them diversify;
Fourthly, develop the capital market effectively, and encourage the financing structure to change from debt financing in primary to equity financing, so as to reduce the leverage ratio of the whole society and ease the risk of the mismatch in enterprises’ capital structure.
Fifthly, adjust income distribution, and deepen the strategic adjustment of the layout of the state-owned economy, to respond to the risk of the social security fund gap. For the purpose, the government should consider further expansion of the size of the budget revenue from state-owned capital operations, which includes further increase of the subjects to whom state-owned enterprises pay profits; increase of the profits paid by state-owned enterprises, and make more effort to use the income from state-owned capital operations as subsidies to social security.
(Source:Cssn.cn)
|
