From cover, issue no.405, February 9, 2009
Translated by Liu Peng
Original article: [Chinese]

China's central government will issue bonds worth 200 billion yuan on behalf of cash-strapped local governments to fund local public welfare projects, the Economic Observer (EO) has learned.

The State Council has issued a circular directing all provincial and autonomy region governments to submit their respective funding requirement to the cabinet by March.

The circular stated that the maturity period for the bonds would be three years, and that the local governments would pay for the principal interest and issuance costs. The payment would be deducted directly from local treasury accounts at year-end.

In order to spur a slowing economy, China has late last year launched a stimulus package worth four trillion yuan, of which, 1.18 trillion would be forked out by the central government, while the remainder be raised by local governments.

"We are stressing over where to get funding for the local stimulus package," said one anonymous treasury official from the north-western Ning Xia Hui Autonomous Region.

Local governments' tax revenues and other incomes have declined as the country's economic growth rate slid to a single digit pace. The above source said his region needed to apply for six billion yuan of bond issuance to support planned investment projects.

How to Distribute the Bonds?
As local governments are clamoring to get a slice of the 200 billion yuan in bonds, how to fairly distribute the funding has become a primary concern.

The EO learned that the Ministry of Finance (MOF) has held several rounds of discussions with local officials, and that three major criteria for entitlement of funding were outlined - the scale of central government investment in the planned local projects, local developmental needs, and the capacity to repay debt.

"The ability to pay down debt would probably be the decisive factor," said a local finance department official.

The bond's yield and issuance cost remained unknown and would likely be decided in early March. "But we expect that it won't come cheap," said another local official.

Some local officials told the EO that the cost to borrow from commercial banks might even be lower if local governments were skilled in negotiating for favorable credit terms and conditions.

Some analysts noted that the more developed and prosperous coastal regions, with access to a variety of funding channels, might consider other options.

Expectations for Local Bonds
The above-mentioned bond issuance arrangement came after months of speculations that China might finally allow local governments to directly issue bonds for funding.

But some local officials believed the above measure would pave the way for refining regulations on managing local-level funding and debts.

The mounting debt of local governments - which according to open data totaled some four trillion yuan as of the end of 2007 - has been a concern that hindered approval for local bonds issuance.

Local government debts are mainly made up of loans from foreign governments, the Asian Development Bank, the International Fund for Agricultural Development, and domestic financial institutions.

The central government has feared that once the flood-gates were opened, local governments in need of funding would issue bonds at will without careful consideration of their financial capacities.

To prevent further acceleration of local government debt, the legislative department of the MOF has scheduled drawing up guidelines and regulations on ways to improve local governments' liability management this year.

Some local officials expected that once this legislation was in place, approval for local bond issuance might follow suit.