Local governments get go-ahead to sell bonds
For the first time in 17 years, the mainland has given approval for selected local governments to directly sell bonds as it seeks to help them tackle a financing shortfall for public projects.
The Zhejiang and Guangdong provincial governments and Shanghai and Shenzhen municipal governments can now issue three-year and five-year bonds directly on a trial basis, the Ministry of Finance said yesterday. The issuance is subject to an annual quota which cannot be carried over.
The Budget Law, passed in 1994, forbids local governments from direct bond issuance. The finance ministry has been selling bonds on their behalf since 2009 with a full sovereign guarantee, to help them shoulder their share of the 4 trillion yuan (HK$4.87 trillion) stimulus package during the global financial crisis.
'The approval indicates the huge debt repayment pressures that local governments face,' said Lu Zhengwei, an economist at Industrial Bank. 'If debt-raising constraints and supervision are not in place, the go-ahead will bring big risks.'
The solvency of local governments has been under the spotlight since liabilities reached 10.7 trillion yuan at the end of last year, or 27 per cent of the nation's gross domestic product. Some of the projects were covered by insufficient cash flow.
As a means to ease the burden faced by banks, who are local governments' main creditors, and to improve fiscal transparency, many economists have argued that local authorities should be able to sell bonds themselves.
Lu Ting, economist at Bank of America Merrill Lynch, welcomed yesterday's news, saying it was a step towards a solution. 'Amid the sovereign debt crisis, people dislike government debt for good reason. But not all government debt is bad, especially for countries with large accumulated savings. The return on China's local governments' investment may not be low if we take into account all spillovers.'
The ministry said that funds raised by local government bond sales would be kept in a special account which would oversee the payment of interest and principal. It also said local governments should provide timely information to the public regarding local economic and financial conditions.