Conquering China’s Mountain of Debt

“Close the back door, open the front door.” That’s the official slogan used to describe China’s most ambitious reform of government finances in two decades, to be introduced later in 2015. The aim is to wean badly indebted local governments—tens of thousands of cities, counties, and townships—off their dangerous reliance on off-balance-sheet financing and backdoor borrowing, from both banks and the unregulated shadow finance sector. Funds to support China’s rapid urbanization—to build infrastructure, keep pension programs solvent, and more—will come from a vastly expanded, newly legalized local bond market.

“The development of a local bond market … is a real milestone,” says Debra Roane, senior credit officer at Moody’s Investors Service. “Once local governments start issuing debt in their own name, it will be clear that they are responsible for it, and that will ultimately lead to more prudent decision- making. They will stay away from riskier projects.”