The Ministry of Finance is planning to promote a pilot program this year to strengthen local governments’ budget management related to land transactions. That is a measure to curb the growth of local hidden debts, according to an official familiar with the matter.

Under the program, local governments’ financing activities concerning land reservation and sale of land-use rights will be better supervised, a senior official from the ministry’s budget department said.

A special account will be set up to monitor the value of land in the hands of the local governments to ensure it should match the debt raised through local government bonds. Part of the revenue from land sales will be kept aside to prevent debt default risks, according to the scheme.

Sale of land-use rights to infrastructure and property project contractors is usually a key source of the local governments’ incomes.

Local governments are expected to face more pressure on rebalancing their income and expenditure this year, analysts said, especially as property prices have moderated and economic growth has continually slowed in the first quarter.

In the first two months, the government’s incomes from land sales dropped 5.3 percent compared with the same period in 2018, according to the finance ministry’s data.

A pilot program for land financing budget management has already started in Shaoxing, Zhejiang province and the model, which was introduced in October 2018, will be expanded to some other regions, aiming to improve local governments’ financing transparency and risk-resolving abilities, the finance ministry official said. He said the model is based on a dynamic assessment of land prices, aiming to ensure land sale incomes can be sufficient for debt repayment to avoid debt defaults.

According to a document issued by the Shaoxing city government in October, the basic rules of the pilot budget management model involve setting up a special account to monitor the value of land to ensure it should match the debt raised through local government bonds.

According to the document, for projects having an expected return rate of higher than 60 percent, a provision of 20 percent of the net earnings from land sales should be kept aside as funds to prevent debt default risks, especially when land prices drop sharply.

Meanwhile, the ministry is considering different ways to “melt down” hidden local government debt, although it is yet to figure out the best option to be adopted, according to experts who have participated in discussions with ministry officials.

Qiao Baoyun, head of the Academy of Public Finance and Public Policy at the Central University of Finance and Economics, suggested that it might be a good choice to allow professional asset management companies to participate in the debt-resolving process at the local level. It could help remove bad assets from governments’ balance sheets to isolate risks.

“But any choice should be implemented based on the budget law, and the debt should be limited within the annual quota,” he said. “To tighten budget management on land-based financing is one of the measures to control local governments’ hidden debt.”

Another official from the Ministry of Finance said the land income will be used for repaying the existing debt before being earmarked for financing new projects. He also said that the issuance of local governments’ special purpose bonds for shantytown renovation will increase this year.