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Archive
Cover Stories Series 2013> Taxation Reform> Archive
UPDATED: July 9, 2012 NO. 28 JULY 12, 2012
Looking Into Local Financing
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Reform needed

Qian Wenhui: I think there are two solutions to the financing difficulties of local governments. First, market-oriented reform must be conducted. Actually, the government should not take care of everything about financing. Why not open the door to other investors? For some projects with a sound business model, such as highways, other types of investment should be encouraged. Local governments do not need to take so much financing responsibility.

Second, for those projects that do not have a sound business model, other investors could also be allowed to join in while the government provides some subsidies. The Shanghai Municipal Government subsidized more than 10 billion yuan ($1.6 billion) for its metro every year and investors were chosen through open tender. Shanghai has set a successful example for the other regions.

Jia Kang: After decades of development, China has reached the point where it's time to introduce another round of tax reforms. In 1994, China introduced the tax-sharing system, which categorized China's tax revenues into central taxes, regional taxes, and central/regional government shared taxes. The system has entitled the Central Government access to tax revenue, but eventually led to the local governments' financial difficulties. The current fiscal system allows the Central Government to take more than half of tax revenues, leaving a smaller proportion for local governments.

The unbalanced tax division has, to some extent, made local governments turn to non-tax income, such as land sales, to increase income.

A redistribution of tax revenue is one way of dealing with the issue, since the responsibility of governments should be fairly matched with its fiscal power.

Frank Gong, Vice Chairman of China Investment Banking, J.P.Morgan Securities (Asia Pacific) Ltd.: Indirect financing, or lending from banks, has become the major financing channel for most local governments. The risks of local governments were mainly on the banks. This is the shortcoming of the country's current financing market.

In the United States and other advanced countries, banks are not major lenders to local governments. Direct financing means issuing bonds to the market. In the United States, direct financing accounted for 80 percent of the total financing. But in China, this ratio was only 20 percent. To solve this problem, local governments should be allowed to issue bonds themselves, which will effectively disperse the risk to every bond buyer, rather than the banks are the only risk taker.

Reform is urgently needed in solving the problems in local government financing vehicles. This is not a big problem, but we still have no clear roadmap for it.

Ensuring security

Nelson Gu, Vice President of Shanghai Branch of Industrial and Commercial Bank of China: More and more industry insiders are calling for reform in government financing platforms. Personally, I could not agree more with it. The reform is able to solve two problems. First, local governments' mania for lending will be tamed. In China, every new government used to borrow a lot of money after it took power. Much of the money borrowed went into some vanity projects. I believe that this phenomenon will be under control after the reform. Second, the reform will diversify the financing channels for local governments. Currently, most of the local government financing was via commercial banks. This needs to be changed.

To make the change, securitization of loans should be given top priority. As commercial banks, we have suffered too much pressure in choosing borrowers. If local government can secure their loans, we will feel more relaxed.

Stephen Green, head of Greater China Research, Standard Chartered Bank: Securitization is an important way to solve lack of transparency in local government financing platforms. Local governments could invite a company to issue bonds for it. The company is entitled to make public its budget and expectation for investment return. Market will decide whether buying its bond is worthwhile or not.

Email us at: yushujun@bjreview.com

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