Lo­cal bonds set for ap­proval

New fi­nance mea­sures will help mu­nic­i­pal govern­ments re­pay debt

China Daily (Hong Kong) - - BUSINESS / CHINA - By WEI TIAN in Shang­hai weitian@chi­nadaily.com.cn

China may al­low city govern­ments to is­sue mu­nic­i­pal bonds in­de­pen­dently as early as March next year to sup­port their fi­nan­cial need for ur­ban­iza­tion and re­lieve the pres­sure on mount­ing govern­ment debt, ex­perts close to the mat­ter said.

The Min­istry of Fi­nance and Peo­ple’s Bank of China, the cen­tral bank, have been study­ing the fea­si­bil­ity of giv­ing lo­cal govern­ments more au­ton­omy in bond is­su­ing bid to ease their thirst for funds in car­ry­ing out ur­ban­iza­tion projects, the Eco­nomic In­for­ma­tion Daily re­ported.

Su Ming, deputy di­rec­tor of the fis­cal sci­ence re­search in­sti­tute af­fil­i­ated to the Min­istry of Fi­nance, told China Daily that such a pol­icy should be im­ple­mented as soon as pos­si­ble. He said a good time point would be af­ter the next Na­tional Peo­ple’s Congress, which is due in March next year.

“Mu­nic­i­pal bonds were set as a ma­jor fi­nanc­ing tool for govern­ments in the fu­ture,” he said.

Wei Jian­ing, a re­searcher with the De­vel­op­ment Re­search Cen­ter of the State Coun­cil, said the lead­er­ship is will­ing to make the re­form in lo­cal govern­ment debt a ma­jor part of the coun­try’s ur­ban­iza­tion strat­egy. Mar­ket-ori­ented bond is­suances by lo­cal govern­ments should be ex­panded na­tion­wide af­ter a pi­lot pe­riod and will even­tu­ally re­place the old prac­tice.

Tra­di­tion­ally the Min­istry of Fi­nance was re­spon­si­ble for the is­suance and pay­ment of lo­cal govern­ment bonds. Such rights and obli­ga­tions will be re­turned to lo­cal govern­ments once the new pol­icy rolls out.

Pay­ment of the bonds will come from lo­cal govern­ments’ tax rev­enues or prof­its from pub­lic projects on which the money raised via such bonds was spent. Lo­cal govern­ments could ap­ply for bond is­suances by sub­mit­ting fea­si­bil­ity re­ports to the Min­istry of Fi­nance.

“The key is­sue is to nail down the source of pay­ment,” Su said, adding that is­suers of such mu­nic­i­pal bonds must make pub­lic no­ti­fi­ca­tion of their de­tailed in­for­ma­tion be­fore of­fer­ing them for sale, in­clud­ing what other fund­ing sources they hold.

He said only prof­itable projects are likely to be ap­proved: for ex­am­ple, sub­way projects in first- tier cities in­clud­ing Bei­jing and Shang­hai.

China tested sev­eral self­is­sued lo­cal govern­ment bonds in Guang­dong and Shang­hai in 2011, but ex­perts said those bond is­suances cov­ered only projects ini­ti­ated by the cen­tral govern­ment and there­fore coud not sat­isfy the in­creas­ing fi­nanc­ing de­mands for lo­cal pub­lic projects.Fur­ther­more, there was no risk of de­faults be­cause they were en­dorsed by the cen­tral govern­ment.

Lu Zheng­wei, chief econ­o­mist with the In­dus­trial Bank Co, said the di­ver­sity and com­plex­ity in fund­ing has made it harder to trace the risks in govern­ment debt. He said lo­cal govern­ments bor­rowed 600 bil­lion yuan ($ 99 bil­lion) in 2012, yet the fig­ure still lacks trans­parency and most such debts lack reg­u­la­tions gov­ern­ing them.

“Most im­por­tantly, they were not able to un­der­take the fi­nanc­ing func­tion for pub­lic projects,” Lu said.

A re­search re­port by a fis­cal sci­ence re­search in­sti­tute sug­gested China’s mu­nic­i­pal bonds should draw lessons from de­vel­oped mar­kets and strictly fol­low mar­ke­to­ri­ented prin­ci­ples to al­low debt de­fault and es­tab­lish a mech­a­nism to call to ac­count the re­spon­si­ble debt is­suers.

In a re­cent in­ter­view, Fi­nance Min­is­ter Lou Ji­wei urged the es­tab­lish­ment of a sound credit- rat­ing sys­tem for lo­cal govern­ments, in prepa­ra­tion for the launch of mu­nic­i­pal bonds. The Min­istry of Fi­nance is work­ing with sev­eral do­mes­tic credit-rat­ing agen­cies on build­ing such a sys­tem.

The Chi­nese Academy of So­cial Sciences, China’s top govern­ment think tank, on Mon­day pub­lished the coun­try’s first bal­ance sheet.

The re­port es­ti­mated the coun­try’s to­tal net as­sets ex­ceeded 300 tril­lion yuan in 2011, but it noted at the same time that the debt ra­tio for China has been in­creas­ing.

Li Yang, deputy head of the Chi­nese Academy of So­cial Sciences, said China’s to­tal govern­ment debt was close to 28 tril­lion yuan in 2012, equal to 53 per­cent of gross do­mes­tic prod­uct that year. Of that, lo­cal govern­ment debt ac­counted for 20 tril­lion yuan.

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