Budget law amendment may give more financial freedom to local governments

Sometimes, the things that most people talk about, though important, end up being irrelevant in a few years. The current discussions in media circles about Shanghai's pilot Free Trade Zone appear headed in this direction, much like the pilot financial reforms in Wenzhou, or the new investment zones elsewhere in China.

Of course, in the meantime, there are also those who cannot stop weeping over their losses from yet another decline of the A-share stock market without realizing that it has done so several times in the past.

There are also those who lament the dwindling visitors to the Canton Fair, the shopping window for China's exports. But come on, we have been living in the Internet age for some time, haven't we?

People can't stop talking about the things that are the only game they know from the past, forgetting that they are actually living in a time of rapid change - which means, like it or not, the hottest game tomorrow will be different.

One thing to watch is China's new budget law. It has taken a whole decade for lawmakers to come up with an amendment to the almost 20-year-old law, which is out of tune with the realities of today's economy, considering that local governments are eager to take on increasing investment projects but don't have legitimate channels to raise capital on their own.

The existing budget law prohibits local governments from issuing bonds and raising debt. In a province with two dozen cities and 2 trillion yuan ($300 billion) in GDP, it would be unthinkable that local governments, at both provincial and city level, cannot finance their public projects directly through the financial market, although in reality many of them have raised a lot of debt (at least 1 trillion yuan and above) in various ways that are yet to be defined by law.

That makes the government system overly centralized and top-heavy. Local governments need to be more responsible for their financial affairs and not rush in to sponsor development projects based on the needs of the local society.

The draft amendment allows local governments financial autonomy. If it were passed, it would be an unprecedented change in the nation's history.

It would be a change from the concept that, for the sake of the nation's financial security, local governments should never be allowed to debt-finance their budgetary expenditures, for whatever purposes, to the concept that they are allowed to do so, but only through channels that are fully legitimate and can be monitored by the central government and by the public.

So, what's the big deal? The big deal is that the new budgetary system would be tantamount to a major government reform. Once local governments are allowed to raise debt, it is highly likely that their doing so will leave an important political impact.

It would give rise to a series of questions. At the national level, how would the central government share with the provinces and cities all the resources available in the financial market, and how would local governments make themselves responsible financial managers?

On the local level, how would the budget and all the budgetary expenditures be planned and adopted? How would the issuance of debt and use of proceeds be duly supervised?

A stronger system of the people's congress would be required to answer all such questions. And as it were, all levels of the people's congress system would have to rely on professional financial managers to be able to tackle their budget-making task. The people's congress is to act more like the board of directors for a government.

Debt-issuing local governments will also have to learn to work with the market-economy financial advisers like listed companies. To raise the capital they want from a competitive market, they would have to offer investors high-quality projects rather than projects chosen by the mayor based on his whims.

Without such a change, funding would always remain a problem for many things planned by the Chinese leaders, from a more service-oriented economy to such things as new schools and hospitals that are needed in local social development.

The author is editor-at-large of China Daily. Contact the writer at edzhang@chinadaily.com.cn

(China Daily European Weekly 05/09/2014 page13)