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Subnational government debt policy in China has been ad hoc and reactive to infrastructure needs and economic development incentives. Until 2014, provincial and local governments had little or no formal borrowing powers, but used a variety of “backdoor” approaches to finance infrastructure. However with the issuance of the new budget law in 2014, the government has taken the first steps toward rationalizing the use of debt finance by subnational governments. So far, however, the effort has been more focused on making provision for addressing the management of obligations incurred in the last decade than on putting in place the right set of institutions, incentives and controls for a sustainable framework.
In this paper, I address the issue of how China gets from where it is now to a sustainable framework for subnational government borrowing. The next subjects to take up, I think, are the reasons why the present efforts should be focused on a transition program. A debt framework that can be sustainable in the long run will need to wait on structural and management reforms in four areas: (a) developing a strategy for controlling provincial and local government borrowing, (b) modernizing the approach to local government finance and to defining and enforcing hard budget constraints at the subnational government level, (c) establishing a more balanced approach to central and subnational government finances, and (d) identifying repayment options for subnational government debt.
Bahl, Roy. (2015). "Priorities in the Short and Medium Term for China’s Subnational Government Debt" in Good Practices and Options in Subnational Debt Management and Restructuring: Lessons from International Experience, edited by Satu Kahkonen and Sudarshan Gooptu, World Bank Working Paper 102612, p 43-56.