Inland govts' debt 'more risky'

"From a ratings perspective, we can say debt in Chongqing and Guizhou is more risky than in Guangdong and Jiangsu. But we cannot predict whether they will default or not," Guan said.

Local governments can repay debt using many strategies beyond drawing on fiscal revenue, Guan noted.

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A primary option is to roll over debt. Many local governments are already doing that, either by taking out new loans or asking banks to extend the repayment period of maturing debt.

Another strategy, said Guan, is allowing local governments to issue bonds directly. They can then replace the old debt, usually with a short maturity and a high interest rate, with bonds, usually with a longer maturity and a lower rate.

The central government has already signaled its willingness to give local governments some autonomy to issue municipal bonds. Finance Minister Lou Jiwei told a forum over the weekend that the government is considering the possibility.

"It's not fair if projects that will benefit future generations are funded only through the tax payments of the current generation. So it's ok to issue some bonds, but under strict conditions," Lou said.

Analysts said this would be an important shift, because municipal bonds, which usually have long maturities and low rates, match the financial profiles of projects that local governments borrow to pay for.

"A majority of local government debt has been invested in infrastructure projects. The nature of these projects means their short-term cash flow is often insufficient to cover debt payments," said Song Li, a researcher with a think tank under the National Development and Reform Commission.

"However, barred from issuing bonds, local governments have taken to raising short-term debt for long-term purposes. The real problem for China's local governments is maturity mismatch. Municipal bonds can address the problem," Song said.

Guan agreed, saying: "If inland regions can issue a 30-year municipal bond, you really can't say that they won't be able to repay it within 30 years."

But Guan also warned that compared with coastal provinces, inland provinces have pronounced "transparency" and "management" issues.

With a weaker governance capacity, it's uncertain they can use debt efficiently, Guan said.

"A key question is whether they can use that money to invest in projects that really foster wealth creation.

"If they can enhance their repayment capacity, it should be no problem. Otherwise, it is risky," Guan added.