Sept. 10 (Bloomberg) -- Chinese local government financing vehicles’ reliance on land sales and rising land prices to repay debt creates “problems,” People’s Bank of China Governor Zhou Xiaochuan wrote in a commentary.
LGFVs are similar to municipal bonds in more mature markets, with both relying on future income to fund repayments, Zhou said in comments published on the central bank’s website yesterday. The difference is that Chinese financing platforms rely on land sales and not tax revenue for income, he wrote.
“As China rapidly evolves, some local governments want to accelerate their urbanization and require a huge amount of investment,” Zhou wrote. “Yet, government finances are limited, what can they do? So they consider using future income to bridge the current funding gap instead.”
Zhou’s comments come before the results of China’s first full audit in more than two years of its local government debt, which the National Audit Office said in 2011 totaled 10.7 trillion yuan ($1.75 trillion). A lack of transparency in LGFVs prompted Fitch Ratings Ltd. to cut China’s long-term local-currency debt rating in April. China ordered the review in July.
China’s Vice Finance Minister Zhu Guangyao, said at the Group of 20 Summit in Russia last week that the Finance Ministry will release the findings of its audit in October. The total volume of debt is expected to rise slightly, he said.
In his comments yesterday, Zhou also touched on the importance of preferred stocks and convertible bonds to capital markets as China’s economy and market develops. Contingent convertible bonds are a source of emergency capital, he said.
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