Exclusive-China orders local governments to cut exposure to public-private projects as debt risks rise, sources say

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BEIJING (Reuters) — China has ordered its local governments to halt public-private partnership projects identified as «problematic» and replaced a 10% budget spending allowance for these ventures with a vetting mechanism by Beijing as it tries to curb municipal debt risks.

The guidelines were mentioned in a cabinet document that was circulated among local governments, policy banks and state lenders last month, said the two sources with knowledge of the matter. The latest guidelines have not been reported previously.

The State Council has issued detailed guidelines to reform the public-private partnership (PPP) model for the first time since its launch in 2014, and comes as worries grow about the impact of ballooning local government debt on the economy.

Local government debt reached 92 trillion yuan ($12.6 trillion), or 76% of China's economic output in 2022, up from 62.2% in 2019, according to the latest data from the International Monetary Fund.

In an effort to constrain the accumulation of further debt, Beijing will eliminate a regulation allowing local governments to earmark up to 10% of their annual public budget expenditures toward these projects, the sources said.

The 10% expenditure threshold will now be replaced with government authorities' review of each PPP project, they said. The move comes after numerous local governments' PPP expenditure hit the upper limit of the threshold in recent years.

The State Council also asked the local governments to halt «problematic projects», identified in inspections conducted by the National Audit Office (NAO) earlier this year, and address the identified issues, said the sources.

Projects designated as «problematic» are those riddled with irregularities including in which