Moody's sees 'unique path' for local govt bonds

Nation's policies have raised confidence of international investors, says country head

China's regional and local government bond market will be developed with its own characteristics, following neither the United States or Northeastern Asian models, according to Jenny Shi, managing director and country manager for China of rating agency Moody's Investors Service Inc.

Under the US model, the federal government allows local governments to go under if they default, while the North Asian model follows the principle that a central government would always come to the financial rescue of any troubled local government, Shi told China Daily.

A RLG bond market in China was made possible after the revised Budget Law took effect on Jan 1, which will eventually allow provincial administrations to issue bonds directly.

"We have never believed that local government debt in China has developed into a crisis," Shi said. "On the contrary, a mix of policies adopted by the central government since October has strengthened investor confidence.

"All the measures point to a correct direction, that is, toward a more transparent, disciplined market."

Currently only provincial governments are allowed to issue bonds but Shi said she believes over time sub-provincial governments might also be given the qualification.

How soon that will happen, however, will depend on the success of a current pilot program being held, and whether lower-level governments have the demand.

"The Chinese government always takes the trial-and-error approach. External pressing is useless as they have their own timetable," she said.

Shi, who previously worked for Bank of America Merrill Lynch and Morgan Stanley, is well acquainted with the Chinese capital market and international investors' thinking.

She said foreign investors will need time to become familiar with the market before becoming willing to invest in the onshore bond market. "For investors, risk is not a problem. They don't fear risk but fear that they don't know where the risks lie exactly. They fear they don't know how the worst case might play out," Shi said.

That, she said, is where Moody's Investors Service might be able to offer valuable assistance. As an institution with nearly 100 years of history studying defaults, the company has developed its own strong rating methodology and default database, Shi said.

It has got involved in the onshore market through its joint venture: Beijing-based China Chengxin International Credit Rating Co Ltd.

One of the most common complaints of foreign rating agencies regarding the China market is the lack of default records, which has made it difficult to expose potential risks and verify ratings.

The belief that the government will always lend a hand has created a "moral hazard", an economic situation defined as when one party gets involved in a risky event knowing that it is protected because someone else is likely to bear the burden or cost of that risk, said Shi.

Shi disputed the idea that defaults should be compulsory so that investors could be educated. Shi said though a default will doubtlessly attest credit analysts' ratings, whether that gain will justify the financial losses to creditors, and the society at large is questionable.

In China, it will take time to educate investors that they have to assume their own responsibility, Shi said, after all, being able to accurately judge credit risk constitutes the cornerstone of a bond market.