The central government’s approval, allowing local governments to issue toll road special bonds, was welcomed by analysts on July 13, who said it would help fund major road network construction in the central and western regions and lower liquidity risks.
Their remarks followed the issuing of guidelines on the toll road special bonds on July 12 by the ministries of finance and transport, which said provincial-level governments could issue the paper within the central government’s approved annual quotas.
Funding from the bond issuance must be used to build government-operated toll roads.
“It is important for local governments to issue toll road special bonds, as it is a main financial channel for them to construct toll roads and guarantee that China’s road network goal is successfully achieved,” said Zhao Quanhou from the Ministry of Finance’s Research Institute for Fiscal Science.
National road network plans have targeted expressways, a major type of toll road, running 118,000 kilometers by 2030. The country’s expressways covered 99,200 kilometers by the end of 2016, accounting for 84 percent of the goal, with the remaining work mostly to be done in central and western regions.
Zhao said with their smaller populations and road traffic, it is more difficult for central and western regions to raise funds and construct toll roads, so the special bonds could be a vital new financing channel.
“With more industries transferring to these regions, I’m confident in their economic development and the investment returns from toll roads there in the medium and long-term,” Zhao said.
Zhao said the risks for the special bonds were low as local governments can use the income stream from the road tolls, as well as earnings from other sources including roadside advertising, to pay down debt. Additionally, there was strong financial support from the central government.
JZ Securities economist Deng Haiqing said the initiative could regulate local government debt risks in the transport sector.
“Toll road special bonds issued by local governments can have lower financing costs and longer maturing terms than bank loans, which largely decrease the liquidity risk of local governments,” said Deng.
Toll roads stacked up a debt pile of 4.86 trillion yuan ($717 billion) at the end of 2016, with more than 80 percent of their annual income last year going to pay off debt and interest.
Local governments in China used to rely on bank loans to construct toll roads, but now that funding route has been blocked.
Zhao added that issuing toll road special bonds was part of a wider move to have standardized management of local government special bonds.
China’s newly revised Budget Law stipulates that local government can issue bonds－general bonds and special bonds－through a national quota-based mechanism, but more detailed management should be improved.
Analysts said the guidelines on toll road special bonds on July 12－and another guideline on land reserve special bonds announced in June－were the latest moves toward standardized management of local government special bonds.