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China details fiscal reform plans to improve budget management

[SHANGHAI] China on Wednesday published detailed plans to reform its fiscal reporting system, a step toward dealing with the massive debts accrued by local governments in recent years and reallocating budgetary control back to the central government.

The Ministry of Finance has ordered governments at all levels to gradually begin producing fiscal reports based on an accrual accounting instead of the current cash management system.

China urgently needs fiscal reforms to improve budget management and let the central government reassume more spending obligations, reducing the need for local governments to borrow heavily or to sell land to raise revenues for key social services.

"The plans are promulgated to adopt the comprehensive fiscal report system based on accrual accounting to fully and accurately reflect the fiscal status of governments at all levels, their operations and sustainability of fiscal polices in the medium and long term," the Ministry of Finance said in a document published in China's central government website.

Under an accrual accounting model, governments report their fiscal status on the basis of rights and responsibilities established on receivables, while cash management bases reports on fiscal income and spending on actual payments made at the end of fiscal periods.

Adoption of such a system will require governments at all levels to publish detailed balance sheets in a standardised form instead of simply throwing statistics up in an ad-hoc fashion, and will make budgeting processes much transparent and accurate, analysts say.

China plans to establish a commission to work out standards for the new system and to promulgate all related details in 2015, the ministry said on the website

Trial compilation of government fiscal reports based on the new accounting standards will be carried out in 2016 and 2017, and the overall system will be fully established by 2020.

In the meantime, China will work on amending the Accounting Law and Budget Law and related regulations to make them compliant with the latest progress of the fiscal reporting reform, the announcement said.

To support reforms to the budgeting system, China's parliament approved changes to the Budget Law earlier this year, allowing local governments to issue bonds directly for the first time.

Regulators have also experimented with allowing local governments to issue debt directly through a pilot programme under way, while banning them from using the problems-ridden local government financing vehicles (LGFVs) to raise funds.