Local govt bond sales pilot plan expands

Program focuses on coastal areas with high degree of market outlook

Six cities or provinces will be allowed to sell bonds directly this year under an expanded pilot program to establish a regulated financing mechanism for local governments, the Ministry of Finance said in a statement on Thursday.

Jiangsu and Shandong provinces were added to the list, joining Shanghai, Zhejiang, Guangdong and Shenzhen, which were approved by the State Council in November 2011 as the first local governments eligible to issue bonds directly.

Combined bond sales for the pilot regions should not exceed a maximum of 350 billion yuan ($57 billion), a number set in this year's budget report.

Before the pilot program was introduced, local government bonds had to be sold via the Ministry of Finance.

In 2011 and 2012, the pilot governments sold 22.9 billion yuan and 28.9 billion yuan in bonds, respectively, on their own.

But principal and interest payments on these bonds sold by local governments, both directly or indirectly, were still ultimately handled by the Ministry of Finance, according to the statement.

The bonds to be sold this year will have maturities of three, five, or seven years, with each maturity being less than 50 percent of the total sales volume, the statement said.

Zhao Quanhou, head of financial research at the Fiscal Science Research Center at the Ministry of Finance, said the pilot program focuses on market-oriented coastal areas that have more financial professionals.

However, he said, the expansion is only one of size, and there will be "no remarkable breakthroughs" in the reform process if the pilot continues to expand this way.

The pilot regions were also asked to create conditions for establishing a credit rating system for their debt issues.

But Zhao said credit ratings mean nothing unless the local governments have to make repayments on their own.

"As long as the Ministry of Finance is responsible for the repayment, there will be no risks for default," he said.

"But to require the local governments to make repayments would mean more efforts in fiscal reform, and it would take much longer to achieve."

The pilot expansion "is a step along the right path. But given the huge borrowings by local governments, such a small expansion won't have any impact", Ken Peng, a BNP Paribas SA economist in Beijing, was quoted by Bloomberg News as saying.

A report by the National Audit Office last month showed the borrowings of a sample group of 36 local authorities rose 13 percent to 3.85 trillion yuan in the past two years. The regions accounted for 32 percent of total local-government debt at the end of 2010, the auditor said.

Applying the same growth rate nationwide, Moody's Investors Service estimated that local governments' direct and guaranteed debt was 12.1 trillion yuan at the end of 2012.

Moody's lowered its outlook for China's credit rating to stable from positive in April, saying the nation had made less progress than anticipated in reducing risks from local-government debt and credit expansion.

Fitch Ratings also cut China's long-term local-currency rating in the same month, citing the lack of transparency in local authorities' borrowing.

Xiang Songzuo, chief economist of the Agricultural Bank of China Ltd, said multiple measures are needed to solve the local-government debt problem.

"The investment fever of local authorities must be contained to avoid inefficient projects," he said, adding that legislators and the media must play a role in guaranteeing that money is invested in the right place.

In addition, he said, there should be further development of the financial market to provide more financing channels for local governments, while also making preparations for possible default.

Bloomberg News contributed to this story.