China plans bond overhaul to fund $6t urbanization

A man walks past a construction site for a new stadium in Mentougou district, suburb of Beijing Feb 28, 2013. [Photo / Agencies]

China plans major bond market reform to raise the money the ruling Communist Party needs for a 40 trillion yuan ($6.4 trillion) urbanization program to buoy economic growth and close a chasm between the country's urban rich and rural poor.

The Party aims to bring 400 million people to cities over the next decade as the new leadership of president-in-waiting Xi Jinping and premier-designate Li Keqiang seek to turn China into a wealthy world power with economic growth generated by an affluent consumer class.

The urban development would be funded by a major expansion of bond markets, sources with leadership ties, and a senior executive at one of China's "Big Four" State banks, who was formerly at the central bank, told Reuters.

"The urbanization drive will push the domestic capital market liberalization agenda," the senior bank executive said on condition of anonymity. "Urbanization is Li Keqiang's big project. He has to get it right and he is willing to pursue innovation to make it a success."

New apartment buildings where the local government built the homes for former miners and farmers as part of urbanisation programme, are seen in Mentougou district, Feb 28, 2013. [Photo / Agencies]

Set to be confirmed as premier at the end of the annual meeting of China's rubber-stamp parliament, which opens next week, Li must find ways to pay for the urban development that he has made a policy priority.

Central and local governments, as well as bank loans, will fund the costs, the sources said. But, sweeping reforms to create a fully-functioning municipal bond market, boost corporate and high-yield bond issuance and actively steer foreign capital into the sector, are crucial to raising the sums of money China will need, they added.

Despite its ranking as the second-largest economy globally after three decades of stellar growth, China remains an aspiring middle-income country riven with inequality and dependent on State-backed investment.

"If we continue to walk down the path of government spending, it'll be like wearing new shoes, but walking the old road," a source with leadership ties said, requesting anonymity to avoid repercussions for speaking to foreign media without authorization.

Bank debt dependency

China's economy largely relies on State-directed bank lending to fund investment projects, but the massive 40 trillion yuan outlay envisaged to urbanize the rural outskirts of some 270 cities is far beyond the means of the current system.

Bank credit quality was badly strained by the economic stimulus program of 2008 that, at a headline 4 trillion yuan, was only a tenth the size of the urbanization program.

By the end of 2010, local governments had racked 10.7 trillion yuan of mainly bank debt to fund their commitments to the stimulus.

Total debt outstanding in China's fledgling bond market was 26.4 trillion yuan as of the end of January 2013, People's Bank of China data shows - barely a sixth of the size of the US bond market - and most of what is traded is issued by policy banks to support their lending.

The need for bond market reform has grown more urgent since December, when Li accelerated a commitment in China's 12th Five-Yar Plan (2011-15) to spend 40 trillion yuan on urbanization by 2030. That money will now be spent over the next decade.

"(Li) Keqiang changed the target date during the Central Economic Work Conference last December," said a second source with leadership ties.