China local debts growth down, problems hang

Local debt default handling

Also on Tuesday, Finance Minister Lou Jiwei delivered a report on the central government's final accounts in 2013 to the NPC Standing Committee for review.

Lou said in his report that his ministry will properly handle local governments' debt default cases in accordance with "the principles of the market" and highlight the role of the market in restraining local governments.

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But Lou did not detail the concrete market-oriented measures for handling the defaults.

In May, the Ministry of Finance issued a document to allow 10 pilot provinces and cities, including Beijing, Shanghai and Guangdong to directly sell and repay local government bonds on their own, similar to municipal bonds. Credit ratings were later introduced to the bond-issuance pilot.

But the document did not make it clear whether or not a debt default is allowed and how to deal with it.

Market operations mean that the central government will not shoulder all liabilities to repay local governments' debts if a default occurs, said Xia Bin, a member of the State Council and a former member of the central bank's monetary policy committee.

Xia said that local governments may have to clear debts by restructuring assets.

Currently, most local bonds are issued via the Ministry of Finance. The promotion of independent local bond issuing and repayment should be accelerated in the near future, said Bai Jingming, vice-director of the Research Institute for Fiscal Science under the ministry.

On Monday, southern economic hub Guangdong province auctioned the first local government bonds at 3.84-percent, 3.97-percent and 4.05-percent yields, basically flat with comparable treasuries on the secondary market.

The bond sale reached 14.8 billion yuan, 1.85 times oversubscribed.