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Local govts may be allowed to issue bonds

By Jing Ji (China Daily)
Updated: 2008-12-23 07:51

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Top policymakers are considering giving a green light to local governments for bond issuance, a move some have described as a way to finance the nation's $586 billion stimulus package.

The Ministry of Finance handed the proposal to the State Council this month, according to Chengdu Business News.

The ministry also set up a special department responsible for monitoring the debts of local government over the past months.

The central government announced a $586 billion stimulus package for 2009 and 2010, of which local governments' budgets are expected to account for a substantial part. A slump in the real estate sector and the ensuing decrease in land sales, however, meant local governments had little fiscal surplus to pay their parts of the stimulus bill. The nation's budget law also forbids bond issuance by local governments.

"The proposal to loosen the limits is part of a long-term reform, rather than a measure to finance the nation's stimulus package," said Zhao Quanhou with the Research Institute for Fiscal Science under the Ministry of Finance. "Presently, few local governments might want to resort to the tool, given the rigid requirement of the proposal."

According to Zhao, local governments will need to meet very strict regulatory requirements to issue bonds directly, including revealing their status of debts and revenues.

"Some local governments have very poor balance sheets. If they reveal their books, no one would agree to lend," said Zhao.

According to the finance ministry, only seven local governments such as Beijing, Shanghai and Zhejiang had a fiscal surplus in the first half. And the total deficit of local governments amounted to 672.8 billion yuan in the first nine months, or 3 percent of the nation's economic output during the period.

Analysts said local governments have already circumvented the legal barriers for bond issuance over the years, mainly through government-owned investment firms and trusts.

"It's much more convenient for local governments to raise money through State-owned firms and trusts," said Zhang Hanya, a senior researcher with the National Development and Reform Commission.

The total debt held by local governments is estimated to be more than 1 trillion yuan, or 4 million yuan for each township-level government, according to an earlier study by the Development Research Center of the State Council.