Chinese local govt bond issuance gains momentum

Challenges to credibility

As a burgeoning business, the local government bond issuance still faces many challenges.

The introduction of credit ratings is a distinctive feature of the bond issuance this time, but the eight regions that issued bonds in the past three months all got AAA ratings, the highest grade assigned to a debt product, regardless of their economic development level.

The rating is higher than the AA and AA+ normally assigned to the majority of bonds issued by the LGFVs, suggesting the issuer's strong ability to repay.

The underdeveloped northwestern Ningxia Hui autonomous region and the eastern Jiangxi province were rated the same as booming Guangdong province and Shanghai, which stirred doubts among investors as to the credibility of the ratings system, which is meant to allow investors to gauge risk.

"It's hard to judge the credibility of the rating as basic data, including the balance sheets of local governments, has not been released," said Zheng Chunrong, professor with the Shanghai University of Finance and Economics.

The ratings for the eight regions were offered by three independent ratings agencies: Shanghai Brilliance Credit Rating and Investors Service Co Ltd, China Credit Rating Co Ltd and Dagong Global Credit Rating Co Ltd.

Meanwhile, repaying funds raised through municipal bonds will put local government budgets to the test. Without imposing proper fiscal discipline, it will be a challenge to put the issuer's fiscal strength in perspective, according to Lu Zhengwei, chief economist with Industrial Bank Co Ltd.

Having proper budgetary constraints will be a determining factor when reviewing a local government's eligibility to issue municipal bonds, he added.

Minister of Finance Lou Jiwei said in early July that the Chinese government will expand the pilot bond issuance program.

At the same time, Lou called for local governments to make public their balance sheets and for a mechanism to be established to ensure local governments are held accountable for their debts.

The eight regions to have issued their own local government bonds so far are Guangdong, Shandong, Jiangsu, Jiangxi, Ningxia, Qingdao, Zhejiang and Beijing. Shenzhen and Shanghai are scheduled to make the move before the end of 2014.

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