The Risks of Chinese Subnational Debt for Public Financial Management
| Published date | 01 May 2015 |
| Date | 01 May 2015 |
| Author | Jun Ma,George M. Guess |
| DOI | http://doi.org/10.1002/pad.1712 |
THE RISKS OF CHINESE SUBNATIONAL DEBT FOR PUBLIC
FINANCIAL MANAGEMENT
GEORGE M. GUESS
1
*AND JUN MA
2
1
George Mason University, USA
2
Research Centre for Chinese Public Administration, Sun Yat-sen University, China
SUMMARY
This paper examines the important challenge to effective public financial management (PFM) of fiscal risk. In the case of China,
a middle-income country with space to borrow, a major source of risk to the central government is exposure from subnational
government debts. In order to control this exposure and manage it properly, it is important that the level of debt be included in
consolidated balance sheets and that liabilities be recognized. This is important not only for narrow maintenance of financial
position (or PFM discipline) purposes but also to increase national welfare. Managing fiscal risks from this broader perspective
suggests that governments may want to absorb particular risks for purposes such as: unemployment, old age, and poverty spend-
ing. Governments often need to cost-effectively bear some of these risks in order lower social costs and maximize national well-
being. But to do this properly, the government must know first the stock and flow of its total debt. To date, subnational debts in
China have not been properly quantified, and available donor tools such as the Public Expenditure and Financial Accountability
(PEFA) framework are weak. Copyright © 2015 John Wiley & Sons, Ltd.
key words—measuring public sector fiduciary or fiscal risk; Chinese local government debt; Chinese subnational government;
PEFA; aid devolution
INTRODUCTION
The paper raises the issue of Chinese national capacity to impose a strict borrowing and fiscal responsibility frame-
work in the context of an incomplete fiscal decentralization reform. Typical of transitional economies in general,
the move to a market economy takes time and there is often a lag between organizational and institutional devel-
opment, with continued resort to informal mechanisms to deal with debt and public finance. But the effects of
quasi-fiscal borrowing by local governments in this case, together with a lack of valid and reliable fiduciary risk
assessment, may ultimately threaten Chinese macroeconomic stability. There are two kinds of risks to the central
government fiscal position: general economic and specific exposure. General risks include rates of growth and
variability of key commodity prices such as oil. They also include support for state enterprises state-owned enter-
prises (SOEs) and commercial banks. Specific risks take the form of explicit or implicit guarantees. The central
government of any country has explicit obligations to cover public sector salaries and pensions. Implicit guarantees
mean political expectations that the central government will cover obligations such as quasi-fiscal activities of
SOEs and subnational debt (Petrie, 2013: 593–594). To manage and mitigate such risks, they must first be identi-
fied with reliable data and assessed as to their severity. To ensure fiscal discipline and guard against public financial
management (PFM) failures in mitigation, it is recommended that existing risk assessment tools be modified and
that multiple measures of risk be employed to guard against error. In-country monitoring of consolidated local
and national debt should be instituted in the short run.
Despite the growing subnational risk in China, fiscal assessments either remain unavailable to the public or de-
linked from subnational to national PFM risk and suggest the need for further study (e.g., World Bank, 2002). At
*Correspondence to: G. M. Guess, School of Policy, Government and International Affairs, George Mason University, USA. E-mail:
gguess@gmu.edu
public administration and development
Public Admin. Dev. 35, 128–139 (2015)
Published online in Wiley Online Library
(wileyonlinelibrary.com) DOI: 10.1002/pad.1712
Copyright © 2015 John Wiley & Sons, Ltd.
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