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Local Governments in China to Issue “Municipal Bonds”

06-03 00:00 《财经》杂志 《财经》杂志

  By staff reporter Wang Peicheng

  In the Measures on the Pilot Program on Direct Issuance of Bonds and Repayment of Debt by Local Governments in 2014 unveiled May 21, the Ministry of Finance (MOF) stated that the pilot program launched back in 2009 will embrace three big changes this year: a) local governments will issue bonds and repay their debt directly; b) the pilot areas once restricted to coastal regions will expand to inland regions, covering a total of 10 provinces and municipalities; and c) credit ratings will, for the first time, be assigned to local governments.

  The so-called “Direct Issuance of Bonds and Repayment of Debt” means that local governments in pilot areas shall be at the wheel in issuing local government bonds and repaying the principal and interest under the quotas approved by the State Council. The practice is designed to address local governments’ lack of risk control awareness, which results from the fact that local governments, despite being the bond issuer, are not held accountable for repaying debt they incur.

  These changes make local government bonds more similar to municipal bonds issued in developed economies. Caijing also learned that the MOF is trying to build a more comprehensive local government bond financing system. In addition to the general obligation bonds the 10 pilot areas are allowed to issue, a senior MOF official said that the Ministry’s Budget Department is thinking about introducing “earmark bonds” designed to fund specific projects with predictable sources of revenue, which resemble project revenue bonds.

  Caijing recently learned that a credit rating agency from Shanghai has won the tendering process hosted by the Guangdong Provincial Department of Finance to select an agency to rate its local government bonds. Other pilot areas are busy preparing for similar bidding procedures.

  On April 23, the 12th NPC Standing Committee, after reviewing the third edited edition of the draft Amendments to the Budget Law, gave nod to conditional ease of borrowing by local governments. The Amendments are expected to soon pass final review and be officially promulgated. If so, that would have completely removed the main legal obstacles to local governments’ issuance of bonds.

  Despite the MOF’s push for local government debt reform, local governments have continued to borrow through other channels, as indicated by the record size of “urban construction bonds” issued this year. In addition, the National Association of Financial Market Institutional Investors under the People’s Bank of China liberalized the issuance of medium-term notes by financing platforms this year, and recently launched “municipal bills” that are highly similar to municipal bonds. Time, rather than government decree, will decide which model is more vibrant and pragmatic in China, said a senior official at the Department of Fiscal and Financial Affairs, National Development and Reform Commission.

  Regulatory fragmentation in the domestic bond market is posing new challenges to the management of local government debt. An executive at a domestic credit rating company said that other financing channels may also be expanding along with the deregulation of local government bonds, therefore giving rise to new chunks of local government debt.

  The executive argued that the model wherein provincial governments issue bonds while city and county governments spend the borrowings breeds moral hazards, as new officials may refuse to repay debt taken on by their predecessors.

  This concern has been echoed by Gu Shengzu, deputy director of the NPC’s Financial and Economic Affairs Committee. Gu said during group discussions on the Amendments to the Budget Law that going forward, provincial governments may flock to Beijing to try to get a bigger quota from the central government, which gets to decide the amount of bonds each local government can issue, just like city and county governments flock to their provincial capitals to scramble for funds raised through bond issuance.

    Full article in Chinese:http://magazine.caijing.com.cn/2014-06-03/114230969.html


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