China to Permit Some Provinces and Cities to Sell Bonds on Own Credit
Market Likely to Be Tapped in July
China will allow 10 provinces and cities to sell bonds on their own credit later this year, introducing the country's first Western-style municipal bonds as it broadens the financial choices for local governments.
The list will cover six provinces, including the wealthy eastern Zhejiang, Jiangsu and Shandong, southern Guangdong and two less-developed provinces in central and western China. The four cities are Beijing, Shanghai, Shenzhen and another city on the country's eastern coast, said a person familiar with the situation.
The central government will announce the plan later this month and bonds will likely be issued in early July, the person said.
Local governments are generally barred from directly issuing debt because of concerns over rising debt and fears that some local administrations don't have the ability to manage their own funds.
China began issuing local-government bonds in 2009 to offer local authorities more financing channels. The finance ministry sold all such bonds on behalf of the local authorities in 2009 and 2010.
Beijing started a trial program in late 2011 to allow a few provinces and cities to sell bonds directly, a potential first step toward putting local-government finances in order. But the bonds were still supported by the central government, because the finance ministry continued to repay the principal and interest on the local authorities' behalf.
The new municipal bonds will be rated and investors will probably ask for higher yields because the local authorities will repay the debt themselves.
China is revising its budget law to give such bond offers formal permission. The most-recent draft of the law, which still needs legislative approval, includes a provision for local governments to issue bonds directly to fund essential projects.
It is unclear how much debt the 10 provinces and cities will offer this year, but Beijing has raised the total local-government bond quota to 400 billion yuan ($64.2 billion) this year, up from 350 billion yuan in 2013, according to the country's deficit plan for 2014. China announced a larger budget deficit this year as it tries to overhaul the economy and respond to the effects of slower growth.
The finance ministry has asked local governments to make proper use of the bond proceeds, with increased support for social welfare and economic restructuring, the Xinhua news agency said earlier.
China's National Audit Office said in late 2013 that debt and guarantees issued by local governments had surged 67% to 17.9 trillion yuan by the end of June 2013, compared with the last tally of local debt at the end of 2010 of 10.7 trillion yuan.
In response to the 2008 financial crisis, many local governments in China undertook major spending projects to stimulate economic growth. Much of this was financed through special investment platforms set up specifically to skirt rules barring local governments from borrowing directly from financial institutions.
That has led to greater scrutiny from Beijing of local-government financing policies, although it has tried to balance that by opening the doors to governments that prove they can manage their finances successfully.