Local governments issue debt bonds

09:30, June 18, 2010      

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The issuance of bonds for local government resumes today after being halted for half a year, opening up a transparent channel to raise funds to support infrastructure projects, analysts said.

  The Ministry of Finance (MOF) will auction the first batch of bonds worth of 43.8 billion yuan ($6.41 billion) starting today on behalf of nine local governments mostly in western and central regions. Of the first batch, there will be 28.6 billion yuan ($4.19 billion) worth of three-year bonds and 15.2 billion yuan ($2.23 billion) worth of five-year bonds, according to the MOF.

  Local governments will be allowed to issue bonds totaling 200 billion yuan ($29.28 billion) this year, a figure unchanged from 2009.

  The resumption of bond issuance is a must because long-term construction projects pushed under the huge stimulus package of 2008 need follow-up investment from local governments, said Zhao Xijun, deputy dean of the School of Finance at Renmin University of China.

  Local governments often escape the authority's scrutiny by setting up companies to raise funds.

  Allowing debt issuance is cited as one of the ways to force local governments to use more transparent and accountable investment channels.

  Lending to local governments reached 7.38 trillion yuan ($1.08 trillion) by the end of 2009, a jump of 70.4 percent compared to the previous year, Liu Mingkang, chairman of the China Banking Regulatory Commission said at a conference in April.

  This jump in loans taken out has sparked fears over potential debt crises cropping up in regions all around the country.

  If the size of fundraising by local governments remains stable and the country maintains economic growth above 8 percent, there will not be major debt crises, said Lian Ping, chief economist with Bank of Communications based in Shanghai.

  However the economist warned some regions and small- to medium-sized commercial banks might suffer from loan repayment problems in 2012 when loans to most infrastructure projects are due.

Source: Global Times


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