By Xi Si(席斯)
with contributions from interns Zan Xin(昝馨) & Zha Duo (查多)
Economic Observer Online
Oct 20, 2011
Translated by Song Chunling
Original article: [Chinese]

 On Oct 20, the Ministry of Finance officially released the 2011 Pilot Measures for Local-Issued Bonds 《2011年地方政府自行发债试点办法》, giving some local governments the green light to issue their own bonds.

 An official from the Department of Finance in Guangdong told the EO that bonds issued by the local government are a breakthrough in the Budget Law《预算法》, a law that he says belongs to a now-outdated era of economic planning.

 "The emphasis is now on [local] governments' self-control and self-administration. The permission for them to issue bonds shows that the central government is confident for them to take responsibility."

 An official from the Department of Finance in Shanghai says that although the difference between central government-issued bonds and local government-issued bonds isn't so obvious right now, the changes will give local governments more autonomy and flexibility on some projects.

 "This pilot program for bond issues by local governments is on the same scale as the bond issues that the central government had already planned to undertake on their behalf in 2011," said an official in the Department of Finance in Guangdong province. He also said that Guangdong province has been preparing its bond issue since July.

 He added that it doesn’t mean the central government will take a hands-off approach to local governments' bond issues. They will still be monitored and regulated by the central government. Local governments won't be able to issue bonds whenever they like. The official thinks it will gradually reach the stage when the National People’s Congress will become the final decision-maker, with the authority to restrict issuance.

 In some scholars' opinions, however, local governments’ attempt to issue bonds independently is more than just a change in the means of issuance. "The scale of local government issuance this year is within the guidelines issued by the central government, but is likely to rise next year when local governments can determine the size of the issuance according to their need. It will be an important way for local governments to collect money in the future" said a researcher from the National Development and Reform Committee.

 The independently-issued bonds represent an expansion in the powers of local governments, which will benefit the orderly running of the country and can be seen as a major step forward in terms of governance.

 The National Audit Office's (NAO) survey of local debt showed a total of 10.7 trillion yuan of local government debt, which included debts directly owed by local governments and also those for which they have acted as guarantor.

 In 2008, the Ministry of Finance had already begun to closely monitor local government debt, they collated quarterly reports and used other methods to track and categorise the debt in order to get a better handle on it.

 Once the results of the audit emerged, both the structure and scale of local government debt became clearer, which helped speed up the Ministry of Finance’s decision to go ahead with the pilot program.

 According to an official from a local finance department, when the central government issued bonds on behalf of local governments in 2009, the Ministry of Finance told all the provinces that they should make good use of the funds raised through these bonds, as it would help them when it came to issuing their own bonds in 2010.

 However that date for the introduction of the pilot scheme was later pushed back due to uncertainty about the scale of local government debt.

 All provinces have been very enthusiatic about taking part in the pilot, a person close to the Ministry of Finance said. The EO learned that the governor and party secretary of Guangdong province talked over the pilot projects with the Ministry of Finance. Shanghai also made an analysis of its debt by international standards and reported it to the Ministry of Finance.

 Many scholars think that given local governments have already been allowed to accumulate more than 10 trillion yuan in debts in a system that doesn't allow for local government to independently issue bonds, but the improved transparency that is likely to accompany independently issued local bonds is likely to reduce the hidden risks associated with local government debt.

 A researcher from the National Development and Reform Commission says that with the introduction of a self-issued bonds system, many areas still need to be improved, including updating the Budget Law, debt management measures, repayment guarantees and liability for the breach of contract.

 Other analysts also believe that investors’ appetite for local government will fall as a result of the changes.

Links and Sources
Economic Observer Online: Provinces To Issue Own Bonds