More local govts may issue debt directly

Bond sales intended to replace heavy reliance on special borrowing vehicles

China will allow 10 provinces and cities to make direct bond issues starting this year, a move that financial experts said might signal full rights for all local governments to issue debt to support the urbanization drive.

Local governments that will be allowed to sell bonds include those in the cities of Beijing, Shanghai and Shenzhen, wealthy eastern provinces such as Zhejiang and Jiangsu, and two central and western provinces, The Wall Street Journal reported on Monday, citing an anonymous source.

A source with the Ministry of Finance confirmed the report to China Daily, saying that the ministry will set a ceiling for each government, but he declined to give further details.

The central government will announce the plan later this month, and bonds will likely be issued in early July, The Wall Street Journal reported.

The reported plan is in line with a move last month, when the national legislature proposed a draft amendment to the Budget Law, suggesting that local governments be able to sell municipal bonds under narrow parameters.

The current Budget Law, enacted some two decades ago, bars most debt issues by local governments. Even now that the draft amendment has been proposed, there are strong fears among policymakers and academics that some local administrations don't have the ability to manage their own funds. Whether the amendment will be passed remains unclear.

Given these concerns, the reported plan is being seen by some analysts as an effort by the Ministry of Finance to give more legitimacy to the amendment by conducting experiments in more places before lawmakers make a decision.

Jia Kang, director of the Research Institute for Fiscal Science under the Ministry of Finance, says he didn't know the details of the plan. But he added that in general, the plan to allow more local governments to issue debt on their own "conforms to the policy trend".

"This is the megatrend. The bond market, compared with other channels through which local governments have raised debts, is a much more regulated channel," he says.

In response to the 2008 financial crisis, many local governments undertook major spending projects to stimulate economic growth. To skirt rules barring local governments from borrowing directly, much of this was financed through special investment vehicles, commonly known as local government financing vehicles.

Debts raised through the LGFVs lack transparency, and they've sparked concerns over local governments' fiscal positions.

Direct debt and guarantees issued by local governments had surged 67 percent to 17.9 trillion yuan ($2.89 trillion) by the end of June 2013, compared with 10.7 trillion yuan at the end of 2010, according to the National Audit Office.

The central government started a trial program in late 2011 to allow six provinces and cities to sell bonds directly. The bonds were still supported by the central government, as the Ministry of Finance continued to repay the principal and interest on the local authorities' behalf.

The original six cities and provinces (Shanghai, Shenzhen, Guangdong, Jiangsu, Zhejiang and Shandong) are reportedly included in the latest plan.

It's not clear whether the latest plan is an expansion of the previous pilot program, with the same terms, or a new model that means the central government won't repay the principal and interest the local governments' debt.

The Wall Street Journal said the new municipal bonds will be rated and investors will probably ask for higher yields because the local authorities will repay the debt themselves. The details couldn't be independently verified.

According to China's deficit plan for calendar year 2014, the total bond quota for local governments will be 400 billion yuan, up from 350 billion yuan in 2013.

zhengyangpeng@chinadaily.com.cn

(China Daily Africa Weekly 05/23/2014 page23)