China to allow selected local governments to make direct bond issues

BEIJING – China’s Ministry of Finance will allow 10 provinces and cities, including Beijing, Shanghai, Shenzhen, Zhejiang, and Jiangsu, to make direct bond issues. The Ministry will set a ceiling for each government, and bonds will likely be issued in early July, but no further details were given.

The reported plan is in line with a move last month, when the national legislature proposed a draft amendment to the Budget Law, suggesting that local governments should be able to sell municipal bonds under narrow parameters. The current Budget Law, enacted some two decades ago, bars most debt issues by local governments.

To circumvent the ban, local governments often borrow heavily through local government financial vehicles (LGFVs) which often are ill-managed and breed corruption. With no rule requiring LGFVs to be financially transparent, the debts raised by LGFVs have ballooned in recent years with market estimates varying between RMB 15 trillion and 25 trillion, leading to concerns of a local government debt crisis.

Financial restructuring is also necessary for the success of the government’s urbanisation drive, as the cost of infrastructure and social services will be a large financial burden on debt-heavy local governments.