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Concerns rise over local govts' increased debt burden

By Lan Lan (China Daily)

08:40, December 26, 2012

As urbanization gains more attention from policy-makers, concerns have been emerging that future investment will raise local governments' already heavy debt burden and increase the risks for China's economy.

New bonds have enjoyed growth of around 30 percent in 2012, and have become an important source of funding for local governments, gradually replacing bank loans.

More companies have given more preference to the bond market, not only due to tightening credit and money supply, but also due to its relatively low costs, said analysts.

Local governments set up many financing vehicles after the sharp reduction in local revenues caused by the taxation system reform in 1994. As an extension of the government, financing vehicles help it seek funding for infrastructure construction through channels including bank loans and investment bonds.

In China, three regulators manage bond issuance: The National Development and Reform Commission controls corporate bonds issued by State-owned enterprises; the China Securities Regulatory Commission is in charge of bonds issued by listed companies; and the central bank looks after commercial paper and medium-term notes traded in the interbank market.

Bonds issued by local financing vehicles are regarded as corporate bonds, supervised by the NDRC.

According to Huatai Securities, new corporate bonds issued in the first 11 months of 2012 totaled 722.35 billion yuan ($116 billion), among which 401 billion yuan were issued by local financing vehicles, accounting for 56 percent of corporate bonds.

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