Beijing poised to launch treasury bond plan

PUBLISHED : Friday, 02 January, 2009, 12:00am
UPDATED : Friday, 02 January, 2009, 12:00am

Beijing is expected to kick off a plan to issue treasury bonds on behalf of local governments as early as February 1 to help finance the country's economic stimulus and employment programmes.

'The Ministry of Finance is working on the details of the debt issuance,' China Business, a newspaper sponsored by the Chinese Academy of Social Sciences, said, quoting a source.

The ministry is scheduled to make an official announcement on the bond issue at the central fiscal work conference on Monday, the business weekly said, citing a preliminary ministry timetable. The State Council will determine each local government's debt-issue quota on January 20.

Telephone calls to the ministry went unanswered yesterday, a public holiday.

According to the report, the ministry will be solely responsible for the debt issues and local governments will not be directly involved in the process. Local governments will pay back their debt into a special account managed by the finance ministry.

The report did not specify how the funds raised would be distributed to the lower level authorities, but the ministry said in November that the funds would be loans instead of straight fiscal transfers.

As such, the debts would not be counted as debits on the central government's books, leaving Beijing more room to issue debt if it wished, analysts said.

The maturities of the bonds earmarked for local governments are expected to be set at three years, and local governments will have the right to issue further debt if they fail to pay off their first batch of loans by the expiry date. But the right will be revoked if the local governments are still paying off the first batch when the second batch matures, the newspaper said.

The finance ministry will charge punitive interest on any arrears and will deduct a similar amount from the tax income transferred from Beijing to the local governments.

All funds will be managed within overall provincial budgets and monitored by each province's legislature, according to China Business.

Bond traders told the South China Morning Post last month that Beijing would issue 1.6 trillion yuan (HK$1.82 trillion) in treasury bonds this year to help finance its ambitious 4 trillion yuan economic stimulus package.

Up to 800 billion yuan will be used to repay debts maturing this year, while 500 billion yuan will go toward central government spending. The remainder will be distributed to local governments.

Beijing has promised to pour 1.18 trillion yuan into the stimulus package. Local governments, banks and private investors are expected to contribute the rest.

The expansionary fiscal policies will probably boost the ratio of fiscal deficit to gross domestic product to 2.4 per cent this year, from less than 1.5 per cent in previous years.

But analysts said the country had further room to issue debt, given that 3 per cent is the internationally recognised alarm level.

Spending programme

Fiscal policies will likely boost the fiscal deficit to 2.4 per cent of GDP

Beijing will pour 1.18 trillion yuan into a stimulus package totalling, in yuan: yuan4tr