Strengthening Subnational Debt Financing and Managing Risks

The Chinese budget law prevents subnational governments from borrowing. However, Subnational Governments (SNG) borrows indirectly off-budget, through Urban Development and Investment Corporations (UDIC). There are various estimates on the off-budget liabilities, with one estimate having the liabilities at more than 30 percent of Gross Domestic Product (GDP). This paper provides a discussion of more reform options for China, anchored with cross-country experiences and lessons. The way forward is to develop regulatory frameworks that can expand SNG and UDIC market access and debt financing, while strengthening subnational fiscal discipline, managing default risks, promoting capital market development, and supporting macroeconomic management and a stable financial system. The paper is organized as: section two presents fiscal rules and framework - ex ante regulations for subnational debt issuing and procedures. Section three discusses what to do when a subnational government becomes insolvent - ex post system. Section four is devoted to developing regulatory frameworks for UDIC, which may require a debt restructuring system different from a system for direct debt of SNG. Ex post debt restructuring for UDIC may also differ from the existing bankruptcy code in China for corporations due to the fundamental difference between a public entity and a private corporation. Section five focuses on strengthening debt management capacity of SNG particularly with respect to liquidity and refinancing risks. Section six focuses on managing fiscal risks of land financing, given its prevalent use in China. Section seven discusses the development of a competitive and diversified subnational debt market. Section eight concludes with suggested reform options.

Bibliographic Details

Main Author:	Liu, Lili
Language:	English en_US
Published:	World Bank, Washington, DC 2010-08-16
Subjects:	ACCOUNTANT, ACCOUNTING, ACCOUNTING STANDARDS, ACCRUAL ACCOUNTING, AMORTIZATION, AMOUNT OF DEBT, ARREARS, BAILOUT, BAILOUTS, BALANCE SHEET, BANK LENDING, BANK LOANS, BANKRUPTCY, BANKRUPTCY COURT, BANKRUPTCY LAW, BANKRUPTCY PROCEDURES, BENEFICIARIES, BOND, BOND ISSUANCE, BOND ISSUING, BOND SALES, BONDS, BORROWER, BORROWING COST, BORROWING PLANS, BUDGET CONSTRAINT, BUDGET CONSTRAINTS, BUDGET DEFICIT, BUDGETARY FRAMEWORKS, CAPITAL ACCOUNTS, CAPITAL INVESTMENT, CAPITAL INVESTMENTS, CAPITAL MARKET, CAPITAL MARKET DEVELOPMENT, CAPITAL MARKETS, CASH FLOW, CASH MANAGEMENT, CASH RESERVE, CATEGORY OF DEBT, COLLATERAL, COMPETITIVE AUCTIONS, CONSUMPTION EXPENDITURE, CONTINGENT LIABILITIES, CONTRACT LAW, CORPORATE GOVERNANCE, CORPORATE INSOLVENCY, CREDIT ASSESSMENT, CREDIT MARKET, CREDIT MARKETS, CREDIT RATING, CREDIT RATINGS, CREDIT RISK, CREDIT STANDING, CREDITOR, CREDITOR CLAIMS, CREDITOR RIGHTS, CREDITORS, CREDITWORTHINESS, CURRENCY, CURRENCY CRISIS, CURRENCY RISKS, DEBT, DEBT BURDEN, DEBT CAPACITY, DEBT COMPOSITION, DEBT CRISES, DEBT CRISIS, DEBT DEFAULT, DEBT FINANCING, DEBT INSTRUMENTS, DEBT ISSUANCE, DEBT MANAGEMENT, DEBT MARKET, DEBT OBLIGATIONS, DEBT OUTSTANDING, DEBT PAYMENTS, DEBT REPAYMENT, DEBT RESTRUCTURING, DEBT RESTRUCTURING AGREEMENTS, DEBT SERVICE, DEBT SERVICES, DEBT SERVICING, DEBT STOCK, DEBT-SERVICE, DEBTOR, DEBTORS, DEBTS, DECENTRALIZATION, DEFAULT RISKS, DEFAULTS, DEPOSIT, DEVALUATION, DEVELOPING COUNTRIES, DOMESTIC BORROWING, DOMESTIC CURRENCY, DOMESTIC MARKETS, EXPENDITURE, EXPENDITURES, FINANCES, FINANCIAL CRISIS, FINANCIAL DISTRESS, FINANCIAL HEALTH, FINANCIAL INSTITUTIONS, FINANCIAL MANAGEMENT, FINANCIAL MARKET, FINANCIAL MARKETS, FINANCIAL RISKS, FINANCIAL STATEMENT, FINANCIAL STATEMENTS, FINANCIAL SYSTEM, FISCAL AUTONOMY, FISCAL DECENTRALIZATION, FISCAL DEFICIT, FISCAL DEFICITS, FISCAL DISCIPLINE, FRAUD, GENERAL OBLIGATION BOND, GENERAL OBLIGATION BONDS, GOVERNMENT CAPACITY, GOVERNMENT DEBT, GOVERNMENT GUARANTEES, GOVERNMENT MONETARY POLICIES, GOVERNMENT REGULATIONS, INDEBTEDNESS, INDIVIDUAL CREDITORS, INDIVIDUAL INVESTORS, INFLATION, INFLATION RATE, INFORMATION SYSTEMS, INFRASTRUCTURE BONDS, INFRASTRUCTURE DEVELOPMENT, INFRASTRUCTURE FINANCE, INFRASTRUCTURE FINANCING, INFRASTRUCTURE INVESTMENT, INFRASTRUCTURE INVESTMENTS, INTEREST PAYMENTS, INTEREST RATE, INTEREST RATE SPREAD, INTERNATIONAL BANK, INTERNATIONAL RATING AGENCIES, INVESTMENT CORPORATIONS, INVESTMENT INSTRUMENTS, INVESTMENT PROJECTS, INVESTOR BASE, ISSUANCE, LEGAL CONSTRAINTS, LEGAL FRAMEWORK, LENDER, LENDERS, LEVEL PLAYING FIELD, LIABILITY, LIQUIDATION, LIQUIDITY, LIQUIDITY POSITION, LOCAL GOVERNMENT, LOCAL GOVERNMENTS, MACROECONOMIC CRISIS, MACROECONOMIC MANAGEMENT, MACROECONOMIC VARIABLES, MARKET ACCESS, MARKET DEVELOPMENT, MARKET DISCIPLINES, MARKET PARTICIPANTS, MARKET RISKS, MATURITIES, MATURITY, MORAL HAZARD, MUNICIPAL BOND, MUNICIPAL BONDS, MUNICIPAL FINANCE, NATIONAL DEBT, NATIONAL TREASURY, NON-PERFORMING LOANS, OUTSTANDING DEBT, PENSIONS, PORTFOLIO, PRINCIPAL REPAYMENT, PRIVATE CREDITORS, PRIVATE DEBT, PRIVATE DEBTORS, PRIVATE FINANCING, PROVINCIAL DEBT, PUBLIC ASSETS, PUBLIC BANKS, PUBLIC DEBT, PUBLIC FINANCE, PUBLIC FINANCES, PUBLIC INVESTMENT, PUBLIC SECTOR BANKS, REAL INTEREST, REAL INTEREST RATE, REAL INTEREST RATES, REGULATORY FRAMEWORK, REGULATORY FRAMEWORKS, REPAYMENT, REPAYMENT OF PRINCIPAL, RESERVES, REVENUE BONDS, RIGHTS OF CREDITORS, RISK MANAGEMENT, RISKY BORROWERS, SALE OF PROPERTY, SHORT MATURITIES, SHORT MATURITY, SHORT-TERM BORROWING, SHORT-TERM DEBT, SOLVENCY, SOVEREIGN BOND, SOVEREIGN DEBT, SOVEREIGN GUARANTEES, STATUTORY REQUIREMENT, STATUTORY REQUIREMENTS, SUBNATIONAL BOND MARKETS, TAX, TOTAL DEBT, TRANSFER INTERCEPTS, TRANSPARENCY, TREASURY BONDS, TRUSTEE, VALUATION, VARIABLE INTEREST RATES, WORKING CAPITAL,
Online Access:	http://documents.worldbank.org/curated/en/2010/08/13159499/china-strengthening-subnational-debt-financing-managing-risks-policy-note https://hdl.handle.net/10986/19471
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