China’s authorities clarified “no-bailout” principle in their new rules on local government debt

Summary

On October 2nd, China’s State Council, the country’s cabinet, 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. Furthermore, it is reported that an unspecified transition period will be given to local governments before their full compliance with the new rules. Overall, we consider it a positive development because these new rules not only provide a long-term solution for the debt overhang of local governments but also 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.

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