The Risks of Chinese Subnational Debt for Public Financial Management

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 spending. 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 (c) 2015 John Wiley & Sons, Ltd.