Borrowing Strategy

Much of the money will be borrowed. The central government’s Ministry of Finance plans to enlarge the issuance of government bonds by 570 billion yuan compared to 2008 to help close a funding gap of up to 750 billion yuan this year. NDRC estimates that local governments will need 240 billion yuan in loans to meet their 540 billion yuan in total capital requirements in 2009, and another 260 billon yuan in 2010.

The burdens for local governments will be especially heavy, since prime revenue sources are falling due to a real estate market recession that’s reduced land leasing income and tax receipts.

Since Chinese law does not allow local governments to directly issue bonds, the central government plans to issue bonds on behalf of the locals. Altogether, the Ministry of Finance this year plans to raise 200 billion yuan through bonds for provincial governments.

A breakdown of the 200 billion yuan bond plan has not be released. Jia Kang, a senior researcher at Ministry of Finance, said Beijing will adjust bond programs according to the needs spelled out when local governments file credit requests.

One obstacle is the uneven repayment abilities of various local governments. Less developed areas may have a more urgent need for infrastructure projects but lack capacity to repay debt. In similar situations in the past, some local governments were buried in debt until the central government intervened with a clean-up project. Questions about this strategy have now resurfaced.

“Is it appropriate for underdeveloped and remote areas to raise debt to finance their infrastructure projects?” asked Jia. “If it is necessary, should the central government help them pay back principle and interest?”

But local governments have other borrowing options. The city of Ningbo, has raised money to supplement the central funding to build a rural health care center. And Wang Renzhou, an NPC representative and NDRC director for Ningbo, told Caijing that local governments can raise money, as an alternative to issuing bonds via the central government,  through government-owned companies by issuing corporate bonds or stock. These kinds of corporate bonds are often called “city construction investment bonds,” and often attract investors due to their low risk of default.

Hebei Construction Investment is an example of a government-owned policy investor with borrowing clout. Its general manager Wang Yongzhong, who is also a member of the China People’s Political Consultative Conference (CPPCC), told Caijing his firm is responsible for raising money to build express railways in Hebei Province.

“We have filed a report to Beijing for issuing 2 billion yuan in bonds in the first quarter,” said Wang.

Beijing’s attitude is to encourage local financing platforms, particularly for roads and power grid renovation projects--such ones not immediately profitable. NDRC’s Zhang said March 16 that 45 corporate bonds programs have been launched since the fourth quarter 2008 to raise 130 billion yuan.

Also, these enterprises controlled by local governments can borrow from commercial banks, which have plenty of room to expand lending. According to a measure now being crafted by Beijing authorities, commercial banks will be able to issue credit to raise the capital base for investment projects. Once the project accumulates an adequate capital base, it can seek further loans.

Banks have already been heralded to help China boost domestic consumption. Beijing set a goal for banks to write at least 5 trillion yuan in new loans this year. Central Bank Gov. Zhou Xiaochuan told the NPC said exceeding the 5 trillion mark “is very important.”