Finance ministry officials have provided further details on the 200 billion yuan local government bond issue recently approved by China's State Council.

Three-year maturity, interest paid annually

The local government bonds are negotiable book-entry bonds approved by the State Council and issued and repaid by governments of provinces, autonomous regions, municipalities and designated cities. The Ministry of Finance will take charge of the distribution and repayment of the bonds as well as the payment of bond issue expenses on behalf of the local governments.

The bonds will be named according to the formula "2009 xxx Province (autonomous region, municipality or city) government bonds (xx issue)". The bonds will mature in three years and interest will be paid annually. The interest rate will be determined through the bidding process.

How the 200 billion yuan cake will be divided

A large part of the 200 billion yuan bonds will be allocated to central and western areas of China, a finance ministry official said.

All local governments are keen on obtaining a big slice of the cake to stimulate their local economy. But the central government needs to weigh a host of factors in determining the allocation, according to the official.

Following the instructions of the State Council, the Ministry of Finance will allocate the bonds according to local funding needs for public welfare projects of the central government, building local fiscal strength, adjusting local debt-to-GDP ratio, and dealing with fiscal difficulties.

Local funding needs for central government's public welfare project will be given the highest priority.

China is putting substantial emphasis on building public welfare projects in central and western areas which have previously been insufficiently funded.

Central and western areas generally have limited financial resources. "If they do not get a big enough quota from the total 200 billion yuan, they will not have the funds to support the public welfare projects," said the official. "This will impact the central government's aim of invigorating those regions."

Availability to investors

According to the Ministry of Finance, investors who have opened a bond account at China Government Securities Depository Trust & Clearing Co., Ltd. (CGSDTC), as well as those have a stock account or a fund account at China Securities Depository and Clearing Corporation Limited, will have access to the newly issued bonds. Individual investors are allowed to purchase the T-bonds if they fulfill one of these conditions. The bond issue is released by the Ministry of Finance, and the new launch will be similar to treasury bonds in terms of credit rating.

Interest rates of the newly issued bonds will fluctuate in response to market conditions.

In order to guarantee the successful issue of the local government bond, holders of the new issue will enjoy certain tax advantages, based on the prevailing practice of other market economies, and existing tax concessions granted to holders of treasury bonds. Interest income on the local government bonds will be free of business income tax and individual income tax.

Regulation and supervision

Funds raised by the issue of treasury bonds are an important part of the fiscal revenue of local governments, and must be brought under budget control and supervised by people's congresses.

To strengthen the control of treasury bond revenue, the Ministry of Finance formulated regulations on the management of government bonds, requiring local governments to bring the revenue and expenditures of T-bond funds into their budget plans. County level governments and most city governments will only have access to funds raised and managed at the provincial level.

T-bonds revenue and expenditures must be brought into the budget management of local governments and approved by people's congresses at the same level. Adjustments should be made to budget plans if they have been approved by people's congresses at the same level and must gain approval from standing committees of the congresses. Departments and institutions that are funded from bond revenue should account for expenditure in their budget plans and utilize the revenue according to the plans.

Management and supervision of the T-bonds revenue and expenditure should be strengthened. Project application, approval, performance evaluation and supervision systems should be established to improve capital management. The use of T-bonds capital must be supervised and inspected by discipline inspection and supervision departments as well as auditing departments. Retaining, diverting or misappropriating funds will be punished.

The Ministry of Finance is presently working on the issue of the T-bonds on behalf of local governments. The ministry and other related departments will also inspect and supervise the use of the T-bond funds to ensure they yield the greatest returns.

Future bond issues will depend on macroeconomic conditions Local government treasury bond issues next year will depend on the economic situation, a Ministry of Finance official said.

The 2009 issue of treasury bonds is part of an active financial policy, aiming at dealing with the global economic crisis and maintaining rapid and stable growth. A framework should be established to regulate debt management of local governments, appraise their repayment capabilities and control repaying risks, covering scale control, risk management, and budget approval. In recent years, the Ministry of Finance has attached great importance to the prevention and diffusion of financial risks, and has also been studying local government debt and measures to promote sustained economic growth.

The ministry will establish an efficient local government debt management mechanism to ensure a stable economic development.

(China.org.cn by Yuan Fang and Yang Xi, March 19, 2009)