New reforms could bring positive change for local govts

The series of reforms announced over the weekend in China could begin to change the way the country's local and regional governments (LRGs) operate, said Fitch Ratings, a London-based credit rating company, on Tuesday.

If implemented effectively, these measures could optimize fiscal transparency and overall budget management, said the company.

Last Friday, the leadership of China issued a decision on "major issues concerning comprehensively deepening reforms", which was approved at the close of the Third Plenary Session of the 18th Communist Party of China Central Committee, a four-day key meeting which ended on November 12. 0b

Fitch counts on two reasons for LRGs to achieve medium-term improvements.

"The first is that these reforms aim to change the incentives of local government operations and raise their overall level of transparency," said Fitch.

The second reason is expectation of gradual improvements in overall budget management, including complication and disclosure of LRG balance sheets, transition to an accrual-based accounting system, and establishment of debt monitoring and risk-alarm system, said the credit rating company.

This would help reduce the unsustainable dependence on land sales and other forms of unstable financing activities.

However, Fitch also pointed out that main challenge for the proposed Chinese reforms could be powerful interest groups at the local level.

"In any event, implementation remains the key to actual credit improvements," it added.

Moody, another international credit rating company, however, said on Monday that the policy statements released last week are credit positive for the sovereign, local governments, state-owned enterprises, property developers and utilities.