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Guidelines issued for local govts to issue special bonds

Wang Yanfei
Updated: Aug 3,2017 10:35 AM     China Daily

The Ministry of Finance on Aug 2 issued guidelines allowing local governments to issue special bonds.

The total amount of bond value cannot exceed the ceiling imposed by the State Council set at the beginning of the year, according to the guideline issued by the ministry.

Apart from bonds of other types, the financing allocation for special bonds is estimated to be around 930 billion yuan ($138.3 billion), including the value of new bonds to be issued this year and the balance remaining at the end of last year.

The guideline makes it clear that governments at the provincial level will be responsible for regulating the issuance of special bonds issued by municipal governments under their jurisdiction.

Provincial officials need to set their own limits to avoid breaking the nation’s debt ceiling.

The central government encourages local governments to launch pilot programs issuing special bonds of different types, with priority given to land revenue bonds and toll road bonds.

Two types of special bonds introduced in June aim to give local governments greater borrowing capacity to finance local infrastructural projects, at a time when local governments have a strong appetite for borrowing in the coming months, according to Liang Hong, chief economist with China International Capital Corporation.

The guideline for bond issuance came after the central government decided to shut the door on off-balance sheet financing channels earlier this year.

Enterprises and banks have been active in the past several years issuing credit to local governments to invest in infrastructure projects.

Guarantees from local governments, often in the form of letters or other documents, helped ensure repayments.

Analysts said off-balance sheet debt raised through such financing vehicles, which do not disclose the size, posed risks to the nation’s financing system.

While the governments’ debt burden remains under control, hidden risks involved in off-balance sheet borrowing deserved attention, according to Zhang Lianqi, a financial expert whom the ministry consults.

The ratio of total government debt to the gross domestic product was around 42 percent by the end of last year, according to the ministry.

With a detailed guideline, local governments would understand the rules, increasing financing to support local projects while not making the overall debt problem worse, according to Sun Binbin, chief analyst at Tianfeng Securities.

Meanwhile Zhang Lianqi said that with more type of bonds to be issued in the future, a more diversified bond market would help address the debt problems, because the disclosure requirements would force local governments to bringing off-balance sheet debt back onto the books.