The Chinese budget law preventssubnational governments from borrowing. However, SubnationalGovernments (SNG) borrows indirectly off-budget, throughUrban Development and Investment Corporations (UDIC). Thereare various estimates on the off-budget liabilities, withone estimate having the liabilities at more than 30 percentof Gross Domestic Product (GDP). This paper provides adiscussion of more reform options for China, anchored withcross-country experiences and lessons. The way forward is todevelop regulatory frameworks that can expand SNG and UDICmarket access and debt financing, while strengtheningsubnational fiscal discipline, managing default risks,promoting capital market development, and supportingmacroeconomic management and a stable financial system. Thepaper is organized as: section two presents fiscal rules andframework - ex ante regulations for subnational debt issuingand procedures. Section three discusses what to do when asubnational government becomes insolvent - ex post system.Section four is devoted to developing regulatory frameworksfor UDIC, which may require a debt restructuring systemdifferent from a system for direct debt of SNG. Ex post debtrestructuring for UDIC may also differ from the existingbankruptcy code in China for corporations due to thefundamental difference between a public entity and a privatecorporation. Section five focuses on strengthening debtmanagement capacity of SNG particularly with respect toliquidity and refinancing risks. Section six focuses onmanaging fiscal risks of land financing, given its prevalentuse in China. Section seven discusses the development of acompetitive and diversified subnational debt market. Sectioneight concludes with suggested reform options.
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