L. V. NOVOSELOVA

Doctor of Economics Institute of the Far East of the Russian Academy of Sciences

Keywords: China, central and local budgets, new version of the Budget Law of the People's Republic of China, local government debts

The high dynamics of state revenues and expenditures observed in China over the past twenty years has ensured a significant increase in people's welfare, rapid development of social and industrial infrastructure, active renewal of the industrial base, etc.

These impressive results of rapid economic growth were accompanied, however, by the identification and aggravation of a number of serious problems in the financial sector. We can say that the Chinese economy has "outgrown" the current system of public finances. As a result, the state of the tax system and public spending, as well as the nature of financial relations between the central and local governments, in fact, do not correspond not only to the level of increased social obligations of the government, but also to the tasks of the PRC in improving economic relations.

What path will China take to address these complex challenges? The study of this issue is not only of obvious research interest. After all, insufficient budget security, financial problems associated with an increase in the burden on regional budgets, with a decrease in their revenue, an increase in expenditure obligations and, accordingly, with an increase in the budget deficit - all these are characteristic features of the current problematic state of Russian regions. The growing budgetary risks of the Russian Federation's constituent entities are a cause for serious concern, especially against the backdrop of the current recession in our country's economy. In these circumstances, the Chinese experience of financial transformation becomes quite substantive and practical for us.

KEY AREAS OF FINANCIAL REFORM

The creation of a more efficient mechanism for managing financial resources looks particularly relevant given such important realities of modern China as the inevitable long-term slowdown in economic growth, combined with the further strengthening of urbanization processes, which places an increased demand on mobilizing all possible sources of finance and improving their efficiency.

Wang Baoan, Deputy Minister of Finance of the People's Republic of China, predicts that by 2020 the share of China's urban population will reach 60% (2013 - 53.7%), which will require investment resources of 42 trillion yuan ($ 6.8 trillion at the current exchange rate) to create new jobs and develop additional labor force in cities. According to the current practice, local authorities finance about 30% of the corresponding costs, while private capital provides 70% of the funds. This means that every year, local governments must find about 5 trillion yuan in the capital market for the purpose of urbanization alone. The solution to this problem will be very problematic without significant changes in the financial sector of the PRC.¹

In this regard, recently, guided by the main ideas of the 3rd Plenum of the CPC Central Committee of the 18th convocation (2013) on further strengthening market principles in the economy, the state has adopted a whole series of important decisions that determine the main content and most important directions of the deep structural reform of the financial system of the PRC.

In June 2014, the Politburo of the CPC Central Committee approved a "Plan for deepening Financial Reform", which defined a "road map" for the transformation of the tax system, budget mechanism and inter-budget relations. ² At the same time, the primary system changes are planned to be carried out by the end of 2016, completing the comprehensive financial reform as a whole no later than 2020.

In August 2014 The Standing Committee of the National People's Congress (NPC) has approved a new version of the Budget Law adopted 20 years ago. The preparation (2004-2010) and review (2011-2014) of the updated law took a total of more than ten years. The amendments, in particular, established a mechanism for managing and controlling local government debt, increased transparency requirements for the budget process, limited the scope of special financial transfers of the central government to regional authorities, strengthened the control functions and powers of the NPC in relation to budget formation and execution, and approved the responsibilities of the People's Bank of China as a manager. state treasury.

Of fundamental importance is the consolidation of four different components of public finances, including the state budget as such, state extra-budgetary funds (funds of ministries, departments and organizations), the capital construction budget (special funds for financing major state projects) and, finally, the social security fund, which was undertaken for the first time in the history of the People's Republic of China within the framework of the integrated national income and expenditure fund

insurance. This should put an end to the practice that has existed in China for many years of forming weakly controlled, non-transparent and poorly managed extra-budgetary revenues and expenditures along with the state budget.

This methodology was used experimentally in the preparation of the 2013 budget. (even before the new version of the Budget Law was adopted) and continued in 2014. The 2014 budget performance report shows the huge scale of extra-budgetary funds that are now included in the system of budget control and regulation. In general, they account for more than 40% of the total amount of state revenues, including 23% of state extra-budgetary funds, 17% of the social insurance fund,and about ¹% of the capital construction fund3.

The new version of the Budget Law entered into force on January ¹, 2015.4 But in September 2014, the State Council of the People's Republic of China adopted a decision to deepen the reform of budget management, including::

- ensuring transparency of central and local budgets: financial authorities at different levels are required to publish detailed financial plans and reports on their implementation no later than 20 days after their approval by the legislative assemblies^.;

- creation of a medium-term budget planning system: drawing up budgets designed for a three-year period, with the possibility of transferring the deficit (or surplus) of the annual budget to the next one or two years, which should facilitate the adoption of economic decisions that go beyond the current financial year;

- improvement of tax administration: a ban is introduced on the use of targeted financial fees by local governments, as well as their independent establishment of tax incentives that violate tax collection and the development of market competition. Instead, it provides for the possibility of universal application of incentive tax benefits and preferences throughout the country in accordance with the national law.;

- making the system of inter-budget transfers more flexible. At the same time, a decrease in the role of targeted financial transfers from the center to the implementation of specific investment projects by local authorities is combined with a corresponding increase in the so-called general transfers transferred to local authorities for independent spending, based on the needs of regional development. Already in 2014, it was planned to reduce the number of projects financed from the center from 220 to 150 and increase the share of unrelated transfers to over 60% of the total amount of funds transferred from the central budget to local budgets (in 2013-56.7%)^.;

- strengthening control over the execution of budgets at all levels, including the application of stricter budget rules and restrictions, improving the work of the Treasury, etc.

DEBT SITUATION OF LOCAL AUTHORITIES

The documents regulating financial reform pay special attention to strengthening the financial position of local authorities and settling local government debts. Collecting about 50% of all state revenues, local budgets traditionally finance the vast majority of social and industrial infrastructure expenditures, providing 85% of government spending. This results in a difficult financial situation for local governments, which is primarily reflected in the avalanche-like growth of their financial debts. ⁷

As of mid-2013, approximately 60% of the total national debt of the PRC, amounting to 30.27 trillion yuan, was held by local governments. In just two and a half years, from late 2010 to mid - 2013, local government debt increased from 10.7 trillion yuan to 17.9 trillion yuan, or 67% ^.8 The ratio of local debt to GDP in China increased from 3.5% in 1996 to 17% in 2007 and 30.6% in 2013.9 In 2013, the IMF estimated that the ratio of local debt to regional domestic product in a number of provinces reached 80%10.

In April 2013, the international rating agency Fitch downgraded China's credit rating from ' AA ' to 'A+' for the first time since 1999. The reason is the tension of local finances and a huge "credit expansion"¹¹. This indicates that this situation in the financial sector is not only one of the central development problems at the regional level, but also represents a certain threat to the stability of the socio-economic development of the PRC as a whole.

The severity and complexity of this problem is compounded by the overall complexity and opacity of the situation. In accordance with the 1994 Budget Law of the People's Republic of China, local authorities were prohibited from directly raising funds from the capital market in the form of both bond loans and bank loans. And this is in a situation where they were assigned the main responsibilities for the socio-economic development of territories with the legal requirement to maintain a balanced budget. That is why the local authorities were forced to use various tricks and informal financial mechanisms to replenish their coffers.

Thus, back in the 1990s, provincial, city, and county governments began to actively create local investment and construction corporations, whose main goal was to implement specific investment projects (industrial parks, railways, and highways, etc.). The first such company was established back in 1992. in Shanghai, they quickly spread to the coastal areas, and then throughout the country. Until 2010, the creation of such companies did not cause objections and was even encouraged by the State Council of the People's Republic of China, especially during the global financial crisis of 2008-2009. As a result, at the end of 2010, there were almost 13,000 such structures in the country, including 6,576 at the provincial level, 1,648 at the municipal level, and 4,763 at the county level.¹²

Being formally independent legal entities, such companies had the right to borrow on the capital market - in the form of bank loans (about 60% of the total amount of funds raised), in the form of corporate loans.-

ligation loans (10%) , etc. Funds were usually raised from regional banks and insurance companies. The so-called shadow credit market, which provided up to ¹³% of borrowings in 201313, often became a source of borrowing. The high dynamics of such operations is eloquently demonstrated by the following data provided by the Asian Development Bank. From 2002 to 2009, the amount of bond loans issued by local investment and construction companies increased from $10 billion. up to $60 billion.

The funds were raised under the guarantees of the relevant authorities, which in fact assumed joint responsibility for servicing and paying off the debt. Most active in this regard were the governments of cities (45% of local government debt in 2013) and counties (36%), which are known to have much lower financial capacity compared to provinces. In addition, the control over their activities by the center is much weaker.

Borrowing was primarily carried out on a short-term basis and at a high interest rate. As a rule, bank loans matured for three to five years, while shadow borrowing matured for no more than one year. At the same time, the received financial resources were mainly directed to infrastructure facilities with long payback periods and, thus, did not create sources of timely repayment of the attracted resources.¹⁴

As a result, local governments were forced to bear the costs of the rapid activity of investment and construction companies created by them, which constantly generated serious financial risks. In fact, these quasi-commercial structures were neither full-fledged market entities that relied on their own capabilities and competencies, nor ordinary state-owned enterprises that were under the watchful control of public administration bodies.

In 2013, the debt of these companies accounted for almost 40% of the total amount of local government debt, and about half of the debt was due to be repaid in the next two to three years. And this is despite the fact that, since 2010, the Chinese government, seriously concerned about the current situation, has made several decisions restricting the activities of local investment companies.

NEW SOURCES OF LOCAL BUDGET REVENUE

At the same time, gradually moving away from the practice of burdening local budgets with the results of the activities of subordinate investment companies, the central government was fully aware of the need for new alternative sources of income at the local level. Already in 2009, responding to the challenges of the global financial crisis, the Ministry of Finance of the People's Republic of China began issuing special bond loans, the funds from the placement of which were intended to balance provincial budgets. In 2009 - 2011, the amount of funds raised in this way was 200 billion rubles. In 2012, it reached 250 billion yuan annually, and in 2013, it even reached 350 billion yuan. RMB.

The distribution of the collected funds between the provinces was carried out by the center, based on a number of criteria. These include: the degree of need for the development of local infrastructure, an assessment of the overall financial situation of the province, the ratio of its income and debts, the prospect of increasing the revenue part of the local budget from its own financial sources, etc. Funds from such bond loans were directed to the revenue side of the provincial budgets, which were responsible for servicing and repaying them. At the same time, in the event of a local budget deficit, this responsibility was fully or partially transferred to the central government, under whose guarantee, in fact, the issue of bonds was carried out. As a result, the erosion of accounts receivable liability did not help to improve the situation with the increase in local debts.

In 2011, the Chinese government made a new attempt to optimize the debt management of regional authorities within the framework of a pilot project announced by the Ministry of Finance of the People's Republic of China for the independent issuance of bond loans by the governments of Zhejiang and Guangdong provinces, as well as the cities of Shanghai and Shenzhen, which were joined in ²⁰¹³ by

Within the quotas approved by the State Council of the People's Republic of China (from 2.2 billion rubles). up to 8.9 billion yuan for Shenzhen. RMB for prov. Zhejiang) issuing governments themselves determined the number of subscribers to the bonds and the size of the coupon. Debt repayment and servicing was the responsibility of the Ministry of Finance of the People's Republic of China, but it was carried out at the expense of a corresponding reduction in financial transfers from the central budget, which was an important step towards local authorities gaining greater economic independence and responsibility for their own income, expenses and debts.

The next step in the same direction was the pilot program of the Ministry of Finance of the People's Republic of China approved in May 2014, which provides for the independent issuance, servicing and repayment of bond loans by ten specially selected territories with the most stable financial situation within the quotas approved by the State Council. These include the cities of Beijing, Shanghai and Shenzhen, the provinces of Jiangsu, Jiangxi, Shandong, Qingdao, Zhejiang, and the Ningxia Hui Autonomous Region.

The program provides for the possibility of issuing local bonds at market interest rates for a period of five, seven and ten years, which more than before corresponds to the timing of the implementation of ongoing infrastructure projects. The territories included in the pilot program were allocated quotas for issuing bond loans totaling 110 billion rubles in the period up to the end of 2014. RMB ¹⁶.

The legislative formalization of this new financial policy was the above-mentioned adoption in August 2014 of a new version of the Budget Law of the People's Republic of China, which established the legal possibility of direct attraction of financial resources by local authorities on the capital market under their own responsibility. In October 2014, in the context of the provisions of the new version of the Budget Law, the State Council of the People's Republic of China issued "Proposals for strengthening the debt management system of local authorities", and

also ,the "Decision on deepening the budget system management reform", regulating the mechanism for issuing local bond loans, as well as the system of control and responsibility for their servicing and repayment. A careful consideration of these legislative innovations makes it possible to clearly present the real measures taken by the Chinese leadership to implement the program postulates on the need to expand the operation of market mechanisms in the distribution of financial resources.

First of all, in order to avoid serious financial risks, it is established that the right to issue bond loans is granted only to provincial governments, as well as to the authorities of territories that are administratively equated to the level of provinces. The rules for issuing bond loans using both administrative levers and market mechanisms are regulated. In particular, it was decided that the placement of local bonds will be carried out strictly within the annual quotas allocated by the State Council of the People's Republic of China and approved by the session or the Standing Committee of the National People's Congress.

The received funds are allowed to be used exclusively for the purposes of infrastructure construction, and it is forbidden to spend them on financing the current activities of local authorities. The funds required for servicing and repaying loans are included in the expenditure side of provincial budgets and must be controlled by the local legislative assembly.

The possible risks of each bond loan will be assessed by the central government. If the established risk tolerance criteria are exceeded, appropriate warnings will be issued, and failure to respond to them by local authorities will be subject to personal punishment.¹⁷

In this regard, the relationship between local governments and investment and construction companies is undergoing a fundamental change. First of all, it is legally established that provincial authorities are no longer allowed to issue guarantees and attract borrowed resources through investment companies, and these companies themselves must be restructured in accordance with the following approximate scheme.

Those of them that are competitive enterprises and implement commercially profitable projects (for example, the construction of commercial housing) should become full-fledged market agents, independently responsible for profits, losses and debts without any involvement of local governments.

Companies with stable incomes and operating in the public services sector (electricity and gas supply, water supply, environmental protection, health care, etc.) can be transformed into public-private partnerships with a clear division of responsibility between state bodies and commercial structures.

Companies that do not have stable incomes are subject to transfer to the category of state-owned enterprises of local subordination, for the financing of which funds received from the placement of bond loans by local governments can be used ¹⁸.

These changes should lead to a significant reduction in provincial debts, increase their transparency, and ultimately put them under the vigilant control of the authorities, who, in turn, are entrusted with the task of monitoring debt indicators on an ongoing basis (the amount of newly attracted loans and overdue debts, the debt-to-GDP ratio, etc.). It will be evaluated by the center, first of all, depending on the state of the debt situation of the subordinate territories.

Thus, it can be stated that the reform of the financial system of the People's Republic of China declared at the 3rd Plenum of the CPC Central Committee of the 18th convocation in 2014 received quite a substantive development, both in terms of legislative registration of the most important changes and the implementation of specific organizational and economic measures for its implementation. As practice shows, China remains faithful to its chosen logistics of reform, which implies gradual, consistent, continuous and verified implementation of changes, taking into account international experience and national realities, while extending the reform process to an increasingly wide range of economic relations. As a result, without abandoning state control over the economy, China is increasingly moving from administrative to regulatory methods of regulation, moving step by step towards a civilized market economy based not on archaic "manual control", but on effective public institutions and the law.

^Wangjun. 1 Local Governments Out of Pocket?// Beijing Review, 2014, N 32.

² www.Online.Barrons.com, 21.10.2014.

³ Calculated according to: "Report on the implementation of the central and local budgets for 2014 and the draft central and local budgets for 2015" - htpp://russian.peopl.com.cn/n/2015/0318/c95181-8864824.html

⁴ China: Fiscal and Tax Reform Since the Third Plenum. Foreign and Commonwealth Office (UK). London, 2014, p. 2.

⁵ China Economic Update. Special Topic: An Update of China's Fiscal and Tax Reforms. World Bank Office, Beijing, October 2014, p. 25.

⁶ www.china.org.cn, 17.03.2014.

⁷ Zhonggo tongji nianjian-2014 (Chinese Statistical Yearbook 2014). Beijing, 2014, Tables 7-1.

⁸ Money Matters. Local Government Finance in the People's Republic of China. Manila: Asian Development Bank, 2014, p. 8.

⁹ Ibid., p. 8, 120.

¹⁰ People's Republic of China: Staff Report for 2014 Article IV Consultation. Washington: World Bank, 2014, p. 27.

^{Canuto O., Liu L.,} 11 eds. Until Debt Do Us Part: Subnational Debt, Insolvency and Markets. Washington: World Bank, 2013; Money Matters... p. 10.

¹² Money Matters.., p. 15.

¹³ China Flash, 03.09.2014 - www.bbvaresearch.com, 14.09.2014.

¹⁴ As of mid - 2013, 35% of local government debt obligations were related to urban construction, 24% to transportation, 7% to affordable housing, etc. Data from the National Audit Office of the People's Republic of China, 2013.

^{Ahmad E., Wang Z.} 15 Financing and Government reform in the People's Republic of China. Manila: Asian Development Bank, 2013.

^Wangjun. 16 Op. cit.

¹⁷ Xinhua News Agency, 03.09.2014.

¹⁸ China Economic Update.., p. 26; www.Online.Barrons.com

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