Local bonds set for approval

New finance measures will help municipal governments repay debt

China may allow city governments to issue municipal bonds independently as early as March next year to support their financial need for urbanization and relieve the pressure on mounting government debt, experts close to the matter said.

The Ministry of Finance and People's Bank of China, the central bank, have been studying the feasibility of giving local governments more autonomy in bond issuing bid to ease their thirst for funds in carrying out urbanization projects, the Economic Information Daily reported.

Su Ming, deputy director of the fiscal science research institute affiliated to the Ministry of Finance, told China Daily that such a policy should be implemented as soon as possible. He said a good time point would be after the next National People's Congress, which is due in March next year.

"Municipal bonds were set as a major financing tool for governments in the future," he said.

Wei Jianing, a researcher with the Development Research Center of the State Council, said the leadership is willing to make the reform in local government debt a major part of the country's urbanization strategy. Market-oriented bond issuances by local governments should be expanded nationwide after a pilot period and will eventually replace the old practice.

Traditionally the Ministry of Finance was responsible for the issuance and payment of local government bonds. Such rights and obligations will be returned to local governments once the new policy rolls out.

Payment of the bonds will come from local governments' tax revenues or profits from public projects on which the money raised via such bonds was spent. Local governments could apply for bond issuances by submitting feasibility reports to the Ministry of Finance.

"The key issue is to nail down the source of payment," Su said, adding that issuers of such municipal bonds must make public notification of their detailed information before offering them for sale, including what other funding sources they hold.

He said only profitable projects are likely to be approved: for example, subway projects in first-tier cities including Beijing and Shanghai.

China tested several self-issued local government bonds in Guangdong and Shanghai in 2011, but experts said those bond issuances covered only projects initiated by the central government and therefore coud not satisfy the increasing financing demands for local public projects.Furthermore, there was no risk of defaults because they were endorsed by the central government.

Lu Zhengwei, chief economist with the Industrial Bank Co, said the diversity and complexity in funding has made it harder to trace the risks in government debt. He said local governments borrowed 600 billion yuan ($99 billion) in 2012, yet the figure still lacks transparency and most such debts lack regulations governing them.

"Most importantly, they were not able to undertake the financing function for public projects," Lu said.

A research report by a fiscal science research institute suggested China's municipal bonds should draw lessons from developed markets and strictly follow market-oriented principles to allow debt default and establish a mechanism to call to account the responsible debt issuers.

In a recent interview, Finance Minister Lou Jiwei urged the establishment of a sound credit-rating system for local governments, in preparation for the launch of municipal bonds. The Ministry of Finance is working with several domestic credit-rating agencies on building such a system.

The Chinese Academy of Social Sciences, China's top government think tank, on Monday published the country's first balance sheet.

The report estimated the country's total net assets exceeded 300 trillion yuan in 2011, but it noted at the same time that the debt ratio for China has been increasing.

Li Yang, deputy head of the Chinese Academy of Social Sciences, said China's total government debt was close to 28 trillion yuan in 2012, equal to 53 percent of gross domestic product that year. Of that, local government debt accounted for 20 trillion yuan.