China bets new bond quotas add up to lower debt risks

Formula will calculate the size of each local government’s share of the bond pie

PUBLISHED : Monday, 03 April, 2017, 9:00am
UPDATED : Monday, 03 April, 2017, 9:30am

Beijing has unveiled a complex formula to calculate the size of each local government’s share of the bond quota pie.

The complexity of the new formula highlights the headache Beijing has to allocate fiscal resources to lower-level administrations even though the municipal bond market remains firmly in the government’s grip.

The Ministry of Finance said on Saturday that the formula was designed to regulate quota management of new bond issues by ­local governments and prevent fiscal and financial risks.

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The quotas should take account of each local administration’s fiscal capacity to ward off debt risks and ensure funding demand. They should also factor in utility efficiency and transparency, the ministry said.

Shen Jianguang, chief economist at Mizuho Securities Asia, said the central government was trying to curb growth in local government debt and the unified calculation was an improvement.

Local governments released more than 6 trillion yuan (US$870 billion) in 1,159 bond issues last year, an increase of over half on 2015, official data showed.

In a report submitted to the National People’s Congress in March, the ministry said outstanding local government debt reached 15.32 trillion yuan last year, well within the 17.2 trillion yuan in quotas.

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The ministry has raised this year’s cap foroutstanding local government bonds to 18.8 trillion yuan.

The formula will take account of spending for major projects in the “One Belt, One Road” initiative, the Beijing-Tianjin-Hebei joint development scheme, and the Yangtze River economic belt, according to the ministry.

The NPC will set a quota range for new bond issues to prevent “overly rapid growth or abnormal volatility” of local government debt and to ensure stable fiscal performance.

Local governments have been allowed to raise debt since Beijing revised the Budget Law in 2014. Nationwide audits were also launched to clarify local debt loads and a debt-swap programme introduced in 2015 to ­delay repayments and lower default risks.

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Du Tao, from Central University of Finance and Economics, said the central government had fleshed out rules for local government bonds, gradually bringing order to the system.

But fears about an increase in the local debt load persist. The ministry launched a series of investigations in the second half of last year into the financing activities of local government-backed financing vehicles, including public-private-partnership projects.

“There are concerns that the number of local government funding companies grew last year ... which may add risks to local government debt. And it is still not known how to effectively strip local governments of those vehicles’ debts,” Du said.