PBOC May Assess Local Debt Burdens Before Direct Bond Sales

PBOC May Assess Local Debt Burdens Ahead of Direct Bond Sales
Pedestrians walk past the People's Bank of China in Beijing, China. Photographer: Nelson Ching/Bloomberg

China’s central bank may grade local governments’ creditworthiness in an internal trial program as officials prepare for debt sales by provincial and city authorities, a state researcher said.

Staffers from the People’s Bank of China and Chinese Academy of Social Sciences are planning to carry out the tests this year, said Liu Yuhui, director of a financial research office at CASS. Researchers in his office will probably assign credit ratings for the central bank’s reference to assess how much a province or city should be able to borrow, Liu said in an interview in Beijing March 21.

China is letting some cities and provinces sell bonds directly after in October ending a ban that prompted local governments to set up thousands of financing arms to fund roads, bridges, and sewage plants. As the government grapples with the threat of soured loans from a record expansion of credit in 2009 and 2010, officials aim to limit future risks.

“The old financing-vehicle model has created lots of problems as debt was hidden from books without effective supervision,” said Liu, whose office is formally known as the Financial Key Laboratory. Assessing the creditworthiness of local governments is “a necessary step,” he said.

Agricultural Bank of China Ltd. yesterday reported a 14 percent drop in quarterly profit as the lender set aside money for bad loans, underscoring concern about how lenders will fare as the economy cools. The company’s shares fell 3.1 percent in Hong Kong as of 11:59 a.m. local time.

Fiscal Grades

Liu said the grades would be closely linked to the fiscal standing of local governments, differing from existing credit ratings granted to local financing vehicles and their projects, he said.

The financing vehicles had accumulated 10.7 trillion yuan ($1.7 trillion) of debt at the end of 2010, according to the National Audit Office. The central bank, whose responsibilities include oversight of credit ratings, is one of the regulators of the nation’s bond market, along with the National Development and Reform Commission and the China Securities Regulatory Commission.

Liu declined to say which central bank department is working with his office on the project. No comment was available from the central bank on the information provided by Liu.

Shanghai became the first local government to sell bonds directly since 1949 when it issued three-year bonds in November as part of a trial program. Guangdong, on China’s southern coast, Zhejiang and the city of Shenzhen have sold similar notes.

Local Risks

The project for assessing local government risks is government-directed and hasn’t involved any independent credit-rating companies, Liu said. The research team is collecting local fiscal data and the trial will initially target provincial governments and then expand to cities and lower municipal levels, he said.

Some governments have exceeded their fiscal capacity by borrowing to finance local projects using guarantees including future revenues from land sales, prompting regulators to restrict new lending. The government has strengthened regulations, urged local authorities to restrict new borrowings and set up funds to ensure debt repayment.

While credit ratings are assigned to the yuan-denominated bonds issued by the local financing vehicles, Dagong Global Credit Rating Co. Chairman Guan Jianzhong said in July 2010 that the grades don’t necessarily reflect risks investors face.

China’s local bond ratings have a “significant upward bias” with 80 percent of issuers rated AA and above, analysts from HSBC Holdings Plc said in a March 7 research note. “Local government-owned entities generally enjoy good credit ratings as markets perceive they have the implicit support of the central government,” HSBC said.

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