China’s new way to kick the can down the road on government debt: longer-term bonds

Beijing has taken new measures to ease debt repayment pressure on local governments, allowing them to issue longer-term bonds.

The finance ministry will for the first time allow provincial and municipal governments to issue 15- and 20-year bonds – previously the longest maturity was 10 years – according to a notice released earlier this week.

It comes as market interest rates have edged up while the supply of fresh funds dried up, adding to the pressure on indebted local authorities. With a longer term, local officials can postpone the bond repayment date for their successors to deal with – it is unusual for a provincial governor or mayor to stay in the same post for 15 or 20 years.

“Debt repayment pressure is big this year, particularly for some of the local governments,” said Wen Laicheng, a professor of fiscal science at the Central University of Finance and Economics in Beijing. “It’s a standard practice that many new issuances will be used to repay old debt.”

A national audit in 2014 confirmed for the first time the size of the debt owed by local governments – 15.4 trillion yuan (US$2.42 trillion), along with 8.6 trillion yuan of contingent liabilities. Soon after, Beijing introduced a programme to replace these debts with more transparent bonds, which the legislature later put an annual cap on, and strictly regulated under a new budget law. About 3.2 trillion yuan of such liabilities were swapped into bonds in 2015, with one major type that matured after three years on most occasions being rolled over.