China clarifies ‘no bail-out’ principle in new rules on local government debt

HONG KONG - China’s State Council has promulgated a set of new rules to regulate local government debt. Chief among them is the central government’s “no-bailout” principle toward debt obligations of local governments. It is also reported that an unspecified transition period will be given to local governments before their full compliance with the new rules.

BBVA Bank says that, overall, it considers the development positive development because the new rules not only provide a long-term solution for the debt overhang of local governments but they initiate the long-awaited overhaul of the fiscal relationship between the central and local governments.

“Nevertheless, operational uncertainties in the transition period could discourage banks or other funding sources from extending new credit to local governments, which could lead to growing liquidity risks and weigh on short-term growth outlook,” BBVA says. www.bbvaresearch.com (ATI).