Local government bonds not to be sold directly
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E-mail Shanghai Daily, June 27, 2012
China has decided not to allow local governments to sell bonds directly following a trial program launched last November, on concerns that mounting debts could bring excessive risks.
Some economists welcomed the move as a measure to tame local governments' appetite for excessive funds, while others worried the lack of a market mechanism for fundraising could hurt efficiency.
During a draft revision to the budget law yesterday, the Standing Committee of the National People's Congress removed an article that would have allowed the authorities to sell bonds within an approved quota.
Local governments with fundraising needs will still need to apply to the central government, and the latter will continue to issue bonds on their behalf.
Hong Hu, a member of the committee, said strict regulations needed to be applied to local government budgets due to problems and potential risks as the value of local government bonds had surged to more than 10 trillion yuan (US$1.57 trillion) over the past few years.
He said proposals allowing local governments to issue bonds directly should be scrapped, and the governments should keep expenditure within the limits of revenue.
Shen Jianguang, a chief researcher with Mizuho Securities, said the decision showed the central government was worried a debt bubble could be created if local governments were allowed to issue bonds directly.
"Once the grip is loosened, local governments that lack self-regulation may issue bonds excessively in pursuit of political achievements," he said.
The tightening measure came after a trial program that began in November allowed city governments of Shanghai and Shenzhen and provincial governments of, Guangdong and Zhejiang to sell bonds after an amount was approved.
The finance ministry is to sell 21 billion yuan of five-year bonds on behalf of the Qingdao, Guangxi, Hainan, Chongqing, Shaanxi, Xinjiang and Gansu governments this Friday, according to a statement on the ChinaBond.com.cn, a bond clearing website.
Local governments were banned from issuing bonds in 1994, which led to the creation of more than 10,000 local-government financing vehicles. These vehicles increased borrowing, mostly from banks, as China launched a 4 trillion yuan stimulus in 2009 designed to hedge economic challenges resulting from the 2008 financial crisis.
As of the end of 2010 they had debts of 10.7 trillion yuan, 27 percent of China's gross domestic product, according to a June 2011 official audit.
This year so far, the vehicles have sold 330 billion yuan of corporate bonds, according to the Beijing-based China International Capital Corp. That compared to 350 billion yuan for last year and 425 billion for 2009.
Some economists had hoped that allowing local governments to issue bonds directly could help them raise funds more easily and avoid defaults.
Xiang Songzuo, a chief economist with the Agricultural Bank of China, said: "Encouraging local governments to issue bonds and allowing credit rating firms to inspect local government spending could greatly improve transparency of fiscal operations."
Xu Xiaonian, a professor with China Europe International Business School, said that central government issuing bonds on behalf of local governments would conceal risks that should be revealed by the yield offered.
Moody's Investment Service said in a report it took a negative outlook of financing vehicles of local governments due to decreasing revenue, low investment returns, risks of existent debt, and the unclear quality of the bonds they issued.
The National Development and Reform Commission, China's top economic planner, last week ordered regional authorities to set up risk monitoring and forecasting mechanisms for debt maturing in 2012 and 2013.
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