New official performance system credit positive

China's recent decision to change the current official performance evaluation system is credit positive for local governments as well as the central government, Moody's Investors Service said in a report on Monday.

Last week, the Organization Department of the Communist Party of China said local government officials will no longer be evaluated primarily on GDP growth, but rather on sound financial management. Local officials will be scrutinized on the debt raised during their terms.

China's traditional evaluation system has pressured officials to promote economic growth at all costs, undermined fiscal discipline and contributed to the rapid rise in contingent, quasi-government debt.

"We expect the new criteria to reduce the proliferation of nonproductive infrastructure projects that often occur near the end of the local officials' terms of service," said Tom Byrne, senior vice-president of Moody's Investors Service. "At the same time, incoming officials will have to honor the obligations entered into by prior administrations, which should lead to greater policy and political continuity that improve governance."