Guangdong leads China's municipal bond issuing pilot

GUANGZHOU/SHANGHAI - South China's Guangdong province has issued the first municipal bond in China, kicking off a more transparent pilot program designed to curb growing debt risks.

Guangdong became the first among 10 regions approved by the State Council, or China's cabinet, to issue their own local government bonds totaling 109.2 billion yuan ($17.7 billion).

Guangdong helps kick off new era

Local governments 'need to refinance debt'

Guangdong on Monday raised 14.8 billion yuan through the issue, with 40, 30 and another 30 percent maturing in five, seven and 10 years respectively.

The returns range from 3.84 to 4.05 percent, below market expectation of higher costs associated with loans local governments have secured in the past through financing vehicles or State-owned firms.

Authorities are now looking to build a municipal bond market for local governments to raise funds for infrastructure as the back-door financing widely used by local governments over the years has stoked fears that unregulated financing activities may cause systemic risk for China's financial system.

Chinese law has prohibited local governments from borrowing directly from any party. Under a small pilot in operation since 2009, the Ministry of Finance has issued bonds on their behalf and pledged to use fiscal revenues to repay the debts.

Some analysts have argued that for municipal bonds to really become the mainstream source of funding for local governments, authorities should expedite the process of revising the current legislation banning local government from borrowing.

"The central government cannot, even if it wants to, grant local governments the freedom to issue muni bonds at their own discretion until the new Budget Law is passed by parliament," said three strategists with Bank of America Merrill Lynch in a recent research note.