Local governments have long sought permission to raise money through bonds. The economic crisis is giving them a new chance.
Wang Changyong, Caijing 13 February 2009
China’s local governments have been called upon to contribute 600 billion yuan in 2009 toward the central government’s 4 trillion yuan stimulus package for fighting the economic slump.
On the surface, it looks like a mission impossible. Local governments may raise only half the amount expected.
But the Ministry of Finance (MOF) and National Development and Reform Commission (NDRC) are working on a plan that could allow local governments, including provinces and municipalities, to raise their stimulus funds by issuing bonds.
In addition, the bond plan, which would involve strong oversight by the central government, could open a new channel for fund-raising by local governments, which are currently barred from issuing bonds.
The plan started emerging a month before the National People’s Congress annual meeting in March. At the meeting, the central government plans to submit a plan for issuing 800 billion yuan in bonds, including 600 billion yuan in central government debt and 200 billion yuan for local governments.
The plan calls for MOF to act as a bond issuing agent and distribute interest payments on behalf of local governments. Local government debtors would pay interest and issuing fees to MOF, while overdue payments would be deducted by MOF from annual subsidies to local governments or other funds channeled through Beijing.
Local Bonds in Demand
Technically, local governments can’t issue bonds. But that doesn’t prevent some from finding creative avenues for raising money to pay debt.
Estimates of local debt by domestic and international research institutions vary widely. Some say China’s local governments are about 1 trillion yuan in the hole, while others peg the total debt load at 10 trillion yuan.
MOF requires local governments to submit annual statements of outstanding debt, but these results are never made public. As part of the debt review process, the ministry every year asks local governments to sketch out volumes, categories and liabilities linked to bonds they issued informally. But locals have withheld the data. Meanwhile, central government bond restrictions have continued.
It appeared the tough restrictions would thaw last year after MOF submitted a plan to the State Council that suggested introducing the long-waited local bonds.
The massive earthquake that devastated part of Sichuan Province last May gave the bond initiative a boost. Provincial officials plead to the central government for permission to issue bonds as part of a fund-raising project dubbed “Beautiful Sichuan.”
MOF gave the plan a green light, but NDRC rejected it after citing concerns about Sichuan’s ability to repay. An NDRC official told Caijing that, in addition to the heavy economic losses incurred by the earthquake, Sichuan was already loaded with debt.
The central government and other, more economically healthy local governments will provide funds to help the quake zone, the official said, while Sichuan can explore traditional fund-raising methods such as a lottery. Bond issuing, however, is not considered a viable solution.
NDRC would only consider approving a local bond issuance in provinces that are richer than Sichuan, said the official.
A Fresh Look
The distressed world economy has helped return plans for local bonds to the table of central decision-makers.
Last year, two solutions gathered steam – one that would allow local governments to issue bonds, and another that would let the central bank issue treasury notes and transfer money to local governments. The latter method was used during the 1997 Asian Financial Crisis.
The plan expected to be reviewed by lawmakers in March takes the middle ground. MOF is calling for capping the total issuance volume at 200 billion yuan and controlling the lending and payback processes.
Local governments and MOF officials would discuss details, such the issue periods, before bonds are sold. Bonds would be traded on the interbank market as well as through a bond market set up by China’s equity exchanges.
MOF and NDRC still disagree over how money raised by local bonds should be used. NDRC wants to ban their use for routine expenditures and exclusively designate funds for projects in line with the 4 trillion yuan stimulus package. Meanwhile, MOF suggests letting local officials use a small amount for non-stimulus purposes.
The bond plan would not require amending the national law on government budgeting, said MOF officials, since the ministry would be the official issuer and the State Council would approve the plan.
Since local congresses have already wrapped up their annual meetings for the year, the proposal for local governments to take on 200 billion yuan in debt this year would require a rewriting of local budgets, which are determined by local legislatures.
In addition to the proposed 800 billion yuan in bonds issued by central and local governments, the central government has already set aside 260 billion for investment in fixed assets for 2009. However, an NDRC official said this spending would not be counted as government fiscal expansion spending, and would not pose an inflation risk.
1 comment:
Silver Lining for Local Government Bonds
Local governments have long sought permission to raise money through bonds. The economic crisis is giving them a new chance.
Wang Changyong, Caijing
13 February 2009
China’s local governments have been called upon to contribute 600 billion yuan in 2009 toward the central government’s 4 trillion yuan stimulus package for fighting the economic slump.
On the surface, it looks like a mission impossible. Local governments may raise only half the amount expected.
But the Ministry of Finance (MOF) and National Development and Reform Commission (NDRC) are working on a plan that could allow local governments, including provinces and municipalities, to raise their stimulus funds by issuing bonds.
In addition, the bond plan, which would involve strong oversight by the central government, could open a new channel for fund-raising by local governments, which are currently barred from issuing bonds.
The plan started emerging a month before the National People’s Congress annual meeting in March. At the meeting, the central government plans to submit a plan for issuing 800 billion yuan in bonds, including 600 billion yuan in central government debt and 200 billion yuan for local governments.
The plan calls for MOF to act as a bond issuing agent and distribute interest payments on behalf of local governments. Local government debtors would pay interest and issuing fees to MOF, while overdue payments would be deducted by MOF from annual subsidies to local governments or other funds channeled through Beijing.
Local Bonds in Demand
Technically, local governments can’t issue bonds. But that doesn’t prevent some from finding creative avenues for raising money to pay debt.
Estimates of local debt by domestic and international research institutions vary widely. Some say China’s local governments are about 1 trillion yuan in the hole, while others peg the total debt load at 10 trillion yuan.
MOF requires local governments to submit annual statements of outstanding debt, but these results are never made public. As part of the debt review process, the ministry every year asks local governments to sketch out volumes, categories and liabilities linked to bonds they issued informally. But locals have withheld the data. Meanwhile, central government bond restrictions have continued.
It appeared the tough restrictions would thaw last year after MOF submitted a plan to the State Council that suggested introducing the long-waited local bonds.
The massive earthquake that devastated part of Sichuan Province last May gave the bond initiative a boost. Provincial officials plead to the central government for permission to issue bonds as part of a fund-raising project dubbed “Beautiful Sichuan.”
MOF gave the plan a green light, but NDRC rejected it after citing concerns about Sichuan’s ability to repay. An NDRC official told Caijing that, in addition to the heavy economic losses incurred by the earthquake, Sichuan was already loaded with debt.
The central government and other, more economically healthy local governments will provide funds to help the quake zone, the official said, while Sichuan can explore traditional fund-raising methods such as a lottery. Bond issuing, however, is not considered a viable solution.
NDRC would only consider approving a local bond issuance in provinces that are richer than Sichuan, said the official.
A Fresh Look
The distressed world economy has helped return plans for local bonds to the table of central decision-makers.
Last year, two solutions gathered steam – one that would allow local governments to issue bonds, and another that would let the central bank issue treasury notes and transfer money to local governments. The latter method was used during the 1997 Asian Financial Crisis.
The plan expected to be reviewed by lawmakers in March takes the middle ground. MOF is calling for capping the total issuance volume at 200 billion yuan and controlling the lending and payback processes.
Local governments and MOF officials would discuss details, such the issue periods, before bonds are sold. Bonds would be traded on the interbank market as well as through a bond market set up by China’s equity exchanges.
MOF and NDRC still disagree over how money raised by local bonds should be used. NDRC wants to ban their use for routine expenditures and exclusively designate funds for projects in line with the 4 trillion yuan stimulus package. Meanwhile, MOF suggests letting local officials use a small amount for non-stimulus purposes.
The bond plan would not require amending the national law on government budgeting, said MOF officials, since the ministry would be the official issuer and the State Council would approve the plan.
Since local congresses have already wrapped up their annual meetings for the year, the proposal for local governments to take on 200 billion yuan in debt this year would require a rewriting of local budgets, which are determined by local legislatures.
In addition to the proposed 800 billion yuan in bonds issued by central and local governments, the central government has already set aside 260 billion for investment in fixed assets for 2009. However, an NDRC official said this spending would not be counted as government fiscal expansion spending, and would not pose an inflation risk.
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