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China unveils rules to rein in bad government investment behaviour

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China unveils rules to rein in bad government investment behaviour
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BEIJING (Reuters) – China has announced long-considered rules on how and where government funds should be invested as Beijing cracks the whip on misappropriation and dubious use of state financing across the country’s vast and often complex structure of government.

Government investment plans must be reviewed for their alignment with national economic and social development goals before they can be approved, the State Council said in a decree published on Sunday.

China will also increase budgetary constraints on government investment funds, which must not be inflated by illegal borrowing, the State Council said.

The rules on government investment behaviour were first drafted in 2001 but were never implemented as China pursued breakneck growth driven by easy credit, loose regulations and state-backed investment.

Some local governments, eager to beat growth targets, had poured funds into projects that went over-budget and were low in returns. Approvals for investment were sometimes subjective and some projects ran into management problems.

If the initial investment estimate for a project exceeds the forecast already approved in the feasibility study by 10 percent, the project may have to be re-evaluated, the State Council said.

The rules will take effect on July 1.

The large amount of funds raised by local governments over the years has been a concern, especially off-balance-sheet borrowing outside quotas approved by Beijing. Such “hidden” local government debts could be in the trillions of dollars in total, S&P Global Ratings warned last year.

To deleverage the economy, Beijing in recent years began to crack down on risky lending practices and rampant borrowing.

President Xi Jinping in January said that local governments and state enterprises must strike a balance between stabilising growth and fending off risks, warning against so-called “grey rhinos”, referring to highly obvious yet ignored threats.

But as the world’s second-largest economy slows in the face of softer domestic demand and a bruising trade war with the United States, the focus of government policy has shifted to stabilising growth, which has again raised concern about China’s commitment to containing financial risks.

(Reporting by Ryan Woo; Editing by David Goodman)

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