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For the first time in China’s modern history, the National People’s Congress (NPC) Standing Committee has introduced a debt ceiling for local government debt, setting it at 16 trillion yuan ($2.5 trillion) for 2015 according to a report in the state-run People’s Daily newspaper.

The decision, announced over the weekend, will keep borrowing within local governments’ ability to repay, said the newspaper.

The ceiling covers all provinces, municipalities and autonomous regions within the country according to the report.

Lou Jiwei, China’s minister of finance, stipulated that the ruling was designed to ensure local government debts never exceed 100% of their wealth-generating capability, as measured by their individual fiscal revenues.

Lou noted that with local government debt likely to hit 16 trillion yuan by year end, the ratio would sit around 86%, something the NPC already deems to be a “high risk level”.

According to the report, local government debt has grown rapidly in recent years, jumping by over 40% in a little over two years.

Liu Jianwen, a professor of finance and law at Peking University, told the People’s Daily that “the quota system will force local governments to become more responsible for their spending and fundraising activities”.

Given the rapid increase of indebtedness it suggests that local government borrowing could be stifled in the years ahead if the debt ceiling is enforced by the NPC.

It may also weigh on infrastructure expenditure, and as a consequence overall economic growth.

It’s an unpalatable balancing act, but one that had to be addressed given the explosion in levels of indebtedness – both in the private and public sectors – seen in recent years.

You can read more here.

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