Friday 20 February 2009
Local Governments to Issue Bonds despite Heavy Debts
With both central and local governments’ fiscal income on the slide, Beijing is to allow local governments to issue bonds, which may total around 200 billion yuan. Local governments are now reporting the amount of debt they plan to issue to the Ministry of Finance and the National Development and Reform Commission.
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Local Governments to Issue Bonds despite Heavy Debts
CSC staff, Shanghai
19 February 2009
With both central and local governments’ fiscal income on the slide, Beijing is to allow local governments to issue bonds, which may total around 200 billion yuan. Local governments are now reporting the amount of debt they plan to issue to the Ministry of Finance and the National Development and Reform Commission.
Rushing to issue
The possibility of raising cash through the issue of bonds is extremely attractive to fund hungry local governments. The central government’s 4 trillion yuan plan has challenged their ability to bankroll the stimulus package. In 2009, local governments may need to raise 600 billion yuan for central government-mandated projects, while it is estimated they would now struggle to amass even half of that.
An official in the Shenzhen Bureau of Finance revealed that the city is planning to issue bonds worth over 10 billion yuan. According to this official, as a city in China’s developed coastal area, with sound infrastructure and finances, and good preparation for the stimulus plan, Shenzhen can put the funds to use immediately after it gets them, and can play a crucial part in stimulating the local economy.
Another official, in the Beijing Bureau of Finance, said Beijing had not decided on the amount of bonds it planned to issue, and was still choosing proper projects. “Funds raised by local bonds will mainly be invested in designated investment projects and welfare projects, and can’t be used for current expenditure.”
In Fujian, the provincial government was also calculating the amount of bonds they were going to issue, said an official from the province’s Financial Administration. “Certainly, local governments hope to issue as many bonds as possible.” This official also said Zhejiang Province had reported a plan to issue 30 billion yuan of bonds.
The amount of bonds local governments are allowed to issue depends on their fiscal income and ability to repay the money. Underwriters of these bonds will be decided by inviting bids, and the bonds can be circulated on inter-bank and securities markets.
Industry insiders believe the credit ratings for the local bonds will be higher than corporate bonds but lower than national debt, and that they will be quite attractive to investors.
But some experts are afraid the credit ratings of local bonds issued by different local governments may differ. “Bonds issued by Shanghai and Zhejiang will certainly have higher credit ratings and be more attractive to investors than those issued by governments in the west of China.”
Measures to control risk
According to article 28 of the Budget Law, without the permission of laws and the State Council, local governments are not allowed to issue bonds. The law does allow some exceptions, however, when necessary.
But allowing local bond issues poses more than a bit of risk. On one hand, it will add to the debt burden of some local governments, which is already very heavy, and on the other hand, preventing local governments from abusing this tool may also be a problem.
According to an early estimation, the present debt burden of local governments exceeds 4 trillion yuan. Interest payments alone account for 1/3 of some district and county governments’ annual fiscal income.
To control risk, a local financial official revealed, local bonds will be issued and repaid by the Ministry of Finance, and local governments only need to settle with it.
This time only provincial governments and governments of cities with independent budgetary status are allowed to issue bonds.
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