New debt instruments needed for local govt in China

Chinese local governments need new debt instruments to melt down bad loans and raise fund for infrastructures, said a famous economist on Friday.

The total local government debt amount, which is predicted to be 20 to 30 percent of China's GDP, requires restructuring through an innovative type of bond, "we can call it the infrastructure bond", to collect capital for infrastructure construction projects, said Li Daokui, the chief economist of the New Development Bank.

This new type of bond should have longer maturities - 20 to 30 years - and with multiple tranches. "A part of the bond tranches can be guaranteed by the central government, and some tranches are guaranteed by the provincial governments," said Li.

Nonperforming local government debt should be separated and taken over by the central government, through issuing treasury bonds, he suggested.

In the meantime, an independent entity could be launched to specifically supervise the local government debt and regulate financial activities. "The measure would improve the efficiency of infrastructure investment and support economic growth, but we need innovations in the financial sector," said Li, at the China Banking & Insurance International Summit Forum 2019.

China's fixed-asset investment growth slowed to 5.4 percent in the first nine months, down from 5.5 percent in the January-to-August period, the National Bureau of Statistics said Friday.

The Ministry of Finance said Thursday that the 2019 annual quota of newly-issued local government bond has almost been issued, and 90 percent of the fund has been used.

The economist also said that the fast-growing debt of nonbanking financial institutions should be given more attention, and some local asset management companies can play an important role to help dispose of nonperforming loans.