China revises law to better manage government money

BEIJING - China's top legislature on Sunday adopted a revision to the Budget Law which clears ambiguity and closes loopholes in managing the trillions of yuan involved in fiscal revenue and spending.

This is the first time the Budget Law has been revised since it took effect in 1995.

As the law is closely interrelated with China's ongoing fiscal reform, it took the country an unusually long time to revise it -- seven years to draft a bill for the first reading in 2011 and four readings to get it passed.

Members of the Standing Committee of the National People's Congress (NPC) adopted the bill through a vote at the bi-monthly legislative session, saying that the revision has responded to improvement in the fiscal system and the most controversial and concerning problems.

In 2014, China's fiscal revenue is budgeted to be 13.9 trillion yuan (2.26 trillion US dollars) and government spending to be more than 15 trillion yuan.

The management of such a huge amount of public funds and supervision of its use remain key challenges for the Chinese government.

The revision to the law is a big move to further the fiscal reform and establish a modern fiscal system, said Zhang Dejiang, chairman of the NPC Standing Committee, at the closing meeting of the session.

The revised law will help establish a complete and transparent budgetary system, transform government functions and modernize governance, Zhang said.

LOCAL GOVERNMENT BONDS

One of the most controversial issues is local government bonds. The old version of the law banned local governments from issuing bonds, but in practice some local governments have sought back doors to raise funds, mostly to fund infrastructure. The money has remained unsupervised.

To tackle this situation, the revision green-lights bond sales by provincial-level governments but places them under strict conditions. It not only restricts the amount of bonds but also regulates how to issue them and use funds raised through bonds.

Under the new version, provincial governments are allowed to issue bonds within a quota set by the State Council, China's cabinet, and approved by the NPC or its standing committee.

Money raised by the bonds can only be used for public services, and not for government operations.

The debts must be included in the provincial budget and supervised by provincial people's congresses.

The central government will assess risk in local debt. If the risk is out of control, it has promised warnings, a fast response and punishment for those responsible.

FULLY BUDGETED GOVERNMENT FUNDS

The old Budget Law was adopted when the country was still strongly influenced by planned economy concepts and at an early stage of applying budget management. It had only a very general definition of what the government budget covered, leaving huge room for interpretation by governments.

The revised law, on the other hand, defines the government budget in four parts: the general budget, the budget for government-managed funds, the budget for state-owned assets and the budget for social insurance funds.

For years, China's government budgets only included the general budget, largely made up of tax revenue and spending on public services and government operations.

The revenue gained through transactions in use rights of state land, accounting for a large part of local government revenues, and finances of state-owned enterprises were not budgeted nor supervised by legislatures.

Under the revised law, the revenue from land transactions is covered by the budget for government-managed funds, while the financial situations of state-owned enterprises are supervised through the budget for state-owned assets.

In 2013, the central government for the first time included these four parts in its annual budget submitted at the NPC annual session.