The first plenary meeting of the 27th session of the 11th National People's Congress Standing Committee on June 26 discussed the draft amendments to the Budget Law, which bans local governments from issuing bonds. Only the financial department of the Central Government can issue bonds on behalf of local governments in accordance with laws and regulations.

In recent years, local governments have accumulated more than 10 trillion yuan ($1.58 trillion) in debt. In light of this, giving stricter regulations to local government debt and banning local governments from issuing bonds have realistic significance. But a simple ban can't solve the problem once and for all.

Several factors contribute to the enormous amount of debt that local governments are mired in and the fundamental reason lies in China's fiscal system. Right now, the system allocates more fiscal income to the Central Government, which severely affects the financial power of local governments due to a flawed transfer payment system. Meanwhile, local governments have a lot to pay for public expenditures.

Second, local governments have their own problems. Some are fond of showing off their wealth by constructing image projects far beyond their financial power. These create huge pressure for the finance of local governments. With a high administrative cost and a large waste of fiscal funds, local governments who can't make ends meet issue bonds so as to carry on with their daily operations.

Third, imbalanced development between different regions has created a gap in terms of fiscal income. Governments in some regions are wealthy while others can't even make ends meet, which forced the latter to issue bonds.

In a bid to tackle the problem, we should intensify efforts in developing regional economies, narrow the gap between the rich and the poor and, most importantly, reform the current fiscal income distribution system.

As a matter of fact, when the fiscal income for local governments can't afford fiscal expenditure, they can only use their resources to gain extra money. Facing the pressure of enormous debt, local governments are forced to "sell land to pay debt." Therefore, when reforming the current fiscal income distribution system, we should increase the proportion for local governments.

Second, we should reinforce examination and supervision over the financing of local governments. Some government officials launch construction projects simply to improve the image of the government. Their decisions are made upon their own will, without a democratic decision-making process. Some issue a large amount of bonds at the end of the term, leaving an awful mess to the successors and causing severe waste of social resources.

Under these circumstances, it's urgent to ensure limited fiscal income of local governments be used in the most needed areas to substantially improve people's well-being. Also, the administrative cost should be lowered; the efficiency of the usage of fiscal capital should be enhanced; the waste of public finance should be avoided. Without corresponding management and supervision measures, these can't be achieved. Hence, local financing should be included in the local budget administration and must be approved and supervised by local people's congresses.

This is an edited excerpt of an article published in the International Finance News