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All Unclear for Local Gov Bonds

The Economic Observer ran a series of five articles this autumn that examined how China's tax and fiscal system operates, focusing on how central and local authorities share government revenue. To read the other articles in the special feature, click here. 

Issue No. 541
Oct 24, 2011
News, Cover 
Original article:

While a company can't issue bonds without providing clear and comprehensive accounts, China's local governments can, despite their mysterious budgets and balance sheets. Last week [this story was published in October], the State Council gave the green light to Shanghai, Zhejiang, Guangdong and Shenzhen to pilot the issuing of local bonds. Meanwhile, the Ministry of the Finance is unable to answer questions from investors about the spending and creditworthiness of these governments.

The EO learned that "the pilot procedure for local government bond issue" limits the risks from different aspects, but it is totally dependent on the central government and doesn't mention the claims that investors might have on the local governments. While an official in Guangdong said "local government finances aren't the main focus for investors, the credibility of the central and local governments is," Standard Chartered Bank economist Stephen Green thinks that investors will seek greater transparency of the local governments issuing bonds.

Local governments rely on the principle that "we (the central government) won't let the local governments go bankrupt," according to Green, who also noted that the biggest challenge for local government bond issuance will be changing the situation whereby the central government is always the ultimate guarantor. The bankruptcy of local government is an efficient way to solve its debt crisis and can be a chance for the government to reconstruct. However the bankruptcy system will have to be different from that of businesses.

Although the size of local government bond issues will be determined by the Ministry of Finance, the biggest attraction for those administrations taking part in the pilot scheme is the right to decide for themselves how to use the proceeds made from bond sales, and the Guangdong official said that his peers in central and western China are also seeking to issue their own bonds.

The central government has been trying to keep a firm grip on the purse strings since the 1990s, and it's hard for the local governments to balance their books. "Local governments don't just want the cash; they also want control over how it can be spent. After all, they're governments too," said one Guangdong official.

However, it's hard to monitor local government bond issuance. More laws and regulations are required, says a scholar from the National Development and Reform Commission.

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