Local govts given more financial freedom

Local governments will be given more rights and obligations in issuing bonds in a bid to ease their debt pressure, Premier Li Keqiang announced on March 5.

In a government work report he delivered to the nation's top legislators, Li said bonds will be come a major financing mechanism for local governments this year, adding that they will have to "issue bonds and repay debt on their own".

China's local governments are generally prohibited from raising money on their own - only six provinces, including Shanghai and Guangdong, were allowed pilot bond issuances, and they were still paid for by the Ministry of Finance.

But the scale of local debt has ballooned on indirect borrowing via financing vehicles.

A survey of local governments by the National Audit Office revealed that their direct and indirect debt came to 17.9 trillion yuan ($2.9 trillion) as of June 2013, up from 10.7 trillion yuan at the end of 2010. Nearly 22 percent of the government debt will mature this year.

"We will strengthen local government bond management and proactively control fiscal risks," Li said.

According to the premier, authorities will gradually remove debt raised via financing vehicles, while any new borrowings will be capped and managed according to categories.

Apart from special authorization, new borrowings can only be used for urban development, public service expenditure and replacement of outstanding debt, and not regular expenditures.

In the meantime, a warning system will be established for bond issuance, and "high-risk regions will not be allowed to take on more debt," Li said.

A draft budget by the Finance Ministry showed that 400 billion yuan in local governments bonds will be issued as part of the 1.35 trillion yuan total government budget deficit projected for this year.

With an additional 150 billion yuan deficit, China's deficit-to-GDP ratio will grow to 2.1 percent from 2 percent last year.

"The current economy still faces downward pressure, with enterprises mired in difficulty," said Zhu Baoliang, an analyst with the State Information Center, a government think tank.

"The country needs a proactive fiscal policy to give it an extra push," he said.

While pressing ahead with tax cuts and higher public spending, the country must keep the deficit rate almost flat in order to guard against risks, Zhu explained.

Bank of America Merrill Lynch Chief China Economist Lu Ting said in a research note that local governments likely will borrow through regulated channels, as the premier promised, to develop a standard local government borrowing mechanism.

"We think some local governments, facing pressure to roll over debt and cut overcapacity, will be active in seeking opportunities to restructure their local SOEs," added Chang Jian, chief economist in China for Barclays Capital.

xinhua contributed to the story.

weitian@chinadaily.com.cn

(China Daily Africa Weekly 03/07/2014 page23)