An official from the People's Bank of China said Beijing should let local governments go bankrupt to help curb excessive borrowing and belie any belief that they have an implicit bailout guarantee, Bloomberg News reported.
The bankruptcy of Detroit in the U.S. would convince investors that Beijing will not offer such guarantees to local governments, Xu Zhong, research bureau head at the People's Bank of China, wrote in a China Business News article published Dec. 25.
Xu's comments follow China's finance ministry's recent statement that it intends to break the "illusion" that Beijing will bail out local governments' hidden debt, the report added.
Vice Finance Minister Zhu Guangyao said Dec. 23 it was critical to address local governments' hidden debts and state-owned companies' debts to prevent systemic financial risks, Bloomberg News reported, citing a China Securities Journal report.
The central government, led by President Xi Jinping, has laid out a financial policy for 2018 that prioritizes reining in debt and preventing major risks as China seeks quality growth.
China's central bank Governor Zhou Xiaochuan has also called for increased scrutiny of local government financing vehicles that are used to disguise debts as he warned of "hazardous" risks in China's financial system.
Local government financing vehicles have sold 1.7 trillion yuan worth of bonds in the onshore and offshore market this year, a 23% decline from the 2016 level, as investors voiced concern about dwindling support for local funding units, according to Bloomberg News.
As of Dec. 27, US$1 was equivalent to 6.56 Chinese yuan.