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China's provinces allowed to issue debts

(Shanghai Daily)

08:49, October 21, 2011

China has given the green light to a trial program that will allow four selected local governments, including Shanghai, to issue bonds for the first time.

The move is meant to narrow financing shortfalls and prevent debt defaults by overextended provinces.

The other three governments, in addition to Shanghai, are the city of Shenzhen and the provinces of Zhejiang and Guangdong. All will be allowed to issue debt on their own, the Finance Ministry said in a statement on its website yesterday without revealing detailed bond sale size for each locale.

A report by Caixin Magazine said the ministry has approved the following amounts for the four governments to issue bonds: Shanghai, 7.1 billion yuan; Guangdong, 6.9 billion yuan; Zhejiang, 6.7 billion yuan; and Shenzhen, 2.2 billion yuan.

Funds raised by local government bond sales will be kept in a special account of the ministry.

The ministry said it will pay the principal and interest on the bonds to investors after the debt matures, and the local governments then repay the ministry. Half of the debt sold in the program will be three-year and five-year bonds, according to the statement.

The pilot program could bring hope for additional funding for local governments, allowing them to roll over debt and meet their obligations.

Numerous financing vehicles across the country set up by local governments after the global financial crisis in 2008 have mired local authorities in a total debt of about 10.7 trillion yuan (US$1.7 trillion), equal to 27 percent of the country's gross domestic product last year, the national audit office said at the end of 2010.

Most of the financing vehicles were to support construction projects that aimed to spur the country's economy. Issuing local government bonds would help them to honor those obligations.

The financing vehicles owned by local governments are due to pay a total debt of about 1 trillion yuan annually starting from this year till 2013, and an outbreak of default could peak during the period, China International Corp warned in an earlier note.

What's more, China is likely to raise interest rates in its sustained fight against inflation, which means local governments may have to pay trillions of yuan more in interest, the leading Chinese investment bank said, adding that the banking system may face a disastrous hit in such a scenario.


Leave your comment2 comments

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wende at 2011-10-2171.255.93.*
some checks and balances to prevent unnecessary and huge projects from taking place. once the flood gates are opened, they are hard to close with huge debts that ultimately will hurt the China.
ari at 2011-10-21175.137.234.*
What took Beijing so long to do this?

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