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Provinces To Issue Own Bonds

By Xi Si
News, Cover
Issue 526, July 4, 2011
Translated by Zhang Wen
Original article

Guangdong and Zhejiang are currently agreeing the details for a local bond issue later this year, which would make them the first two provinces to raise money independently on the capital markets, sources have told the EO. Shanghai is also pushing to be included in the pilot project.

Until now, China’s provincial governments have only been able to issue bonds through the central government. Unlike those bonds, the money in Guangdong and Zhejiang’s independent bond issues will have to be used on specific projects, and not be used for everyday expenditure.

The total amount of debt issued by Guangdong governments at all levels is more than 300 billion yuan, and the region is planning to raise a further 11 billion yuan from the bond issue. Officials in the province say it was chosen to issue China’s first local government bonds because its government has a good record managing its debt.

Guangdong will repay bondholders using government revenue as well as profits from the projects that they finance.

The Ministry of Finance supports the pilot projects in Guangdong and Zhejiang, which it says will encourage investors to focus on the financial health of the local governments.

For its independent bond issue, Guangdong will use the same corporate entity, known as a financing platform, as it has previously used for loans.

The World Bank says that greater financial transparency is required if local governments are to enter China's capital market and start issuing bonds. The Guangdong government is also at the forefront of Chinese efforts to improve information disclosure of government finance, which helped in the decision to award them the privilege of piloting the local bond project.

The central government hasn’t yet named a debt limit for provinces that want to issue bonds interdependently, but Shanghai has assumed that approval will be given for regions with total debt/revenue ratios below 100%, and where the annual cost of repaying and servicing debt doesn’t exceed 20% of revenue. "The (Shanghai) Municipal Government is also considering applying for permission to issue local government bonds, but the first thing we need to do is to identify our debt and see if we meet the requirement to issue local bonds or not." said an official from Shanghai government's finance bureau.

 Bonds issued by economically developed areas are likely to have most appeal for investors, but some analysts say that western provinces will also be able to raise money for high yielding projects.

The Ministry of Finance had planned to let some local governments issue bonds independently in 2010, but put back that date when some authorities were found to have used borrowed funds illegitimately.

The Ministry of Finance has entrusted several agencies to provide credit ratings for local governments and has come up with a complete report, but local finance officials said they had not seen the results.

The budget division and the state treasury division of the Ministry of Finance is busy working on the pilot project. The ministry will use the experience of the central government in issuing bond on behalf of local governments to organize training courses for provincial finance and treasury personnel this year and has drawn on the experience of other countries issuing local bonds.

 According to some insiders, the World Bank is also taking an active role in drawing up plans for local bonds in China, and has provided a lot of technical support for the pilot project.

This story was edited by Will Bland.

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