The State Council released a circular on Nov 14 of a contingency plan to help local governments deal with debt risks.

It is aimed at preventing and resolving government finance risks, maintaining the bottom lines of regional and systematic risks and securing economic security and social stability, according to the circular.

The measures are to be taken to deal with government finance risks incurred by the debts of local government, if they cannot repay the debts on schedule or cannot fulfill their debt responsibilities.

It urged that all governments above county level should set up a leading group as non-permanent institutes to deal with the debt issue. The head of the local government should lead the group, and members should include local departments in finance, development and reform, audit, State-owned assets, finance supervision, local branches of People’s Bank of China and local banking sector institutes, according to the document.

The Ministry of Finance should establish an evaluation and warning mechanism for local debt risks to regularly evaluate the risks and give warnings to the governments involved, and the local governments should set up a reporting system for debt risks, to report problems in a timely manner, the document said.

It also listed response measures to different kinds of debt risks, including local government bonds, stocks of contingent liabilities, newly emerging illegally secured debt and other debt categories.

Government debt risks will be defined by four levels — LevelⅠ, LevelⅡ, Level Ⅲ, and Level Ⅳ — with LevelⅠbeing the most high-risk, said the circular.

Situations in LevelⅠinclude defaulting on the bond issued by provincial governments, and debt defaults of over 15 percent of municipal or county governments in a provincial region.

At Level Ⅱ, 10 percent to 15 percent of municipal or county governments in a provincial region would fail to pay their debts.

In principle, the central government would not pay local governments’ debts, but if provincial governments cannot pay their debts through any means, they could request a loan from the State Council, according to the circular.

Local governments are urged to take different measures for risks of different levels.

At Level Ⅳ, municipal or county governments are asked to take measures such as shrinking investment, borrowing money from government funds, State-owned capital, or the balance from other projects and cutting budgets. If necessary, government assets would be sold to pay the debts.

At levels Ⅲ, Ⅱ and Ⅰ, local governments could request help from higher governments as an additional measure.

Financial restructuring would be done for local governments if necessary. Restructuring items include expanding incomes, cutting budgets, tightening checks on budget and improving financial management.

After the risks are resolved, local governments should evaluate the issue and report to the standing committee of the National People’s Congress at the local level and its upper governments.

Government officials would be held accountable if they violate any related laws and regulations that led to the risks, and their actions in dealing with the risks will be included in the performance appraisal system, the circular said.