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China to Allow Local Governments to Sell Bonds Directly

China will allow local governments to apply for direct bond sales to refinance high-cost debt loads, Finance Minister Lou Jiwei said.

The central government will control the quotas within which local governments can borrow money, according to comments that Lou made in a report on the 2014 budget delivered to the standing committee of the National People’s Congress yesterday. The remarks were contained in a transcript posted on the finance ministry’s website today.

Premier Li Keqiang is allowing regional authorities to raise money directly, after they accumulated 17.9 trillion yuan ($2.9 trillion) in debt in an effort to avert a slowdown in the world’s second-largest economy. China’s towns and cities have used more than 10,000 financing vehicles to sell notes after they were barred from directly issuing bonds under a 1994 budget law. The state council said in May it had approved a plan to cut reliance on the funding units.

“The remarks point out the direction of the policy,” said Li Ning, a bond analyst in Shanghai at Haitong Securities Co., the nation’s second-biggest brokerage. “Even though we don’t know when the new budget law will be passed, it’s certain that the new policy will help ease local governments’ interest burden.”

Local governments will be allowed to raise some of their construction funds by selling bonds, the official People’s Daily reported on Aug. 26, citing the latest amendment of China’s budget law.

Local government financing units must repay a record 352.6 billion yuan of maturing bonds this year, according to Everbright Securities Co. estimates.

The statement also said the government will strictly control the increase in local governments’ borrowings.

The proposal from the finance minister is a welcome measure, according to Wee-Khoon Chong, head of Asia ex-Japan rates strategy at Nomura Holdings Inc. in Singapore.

“It would serve both to lower financing costs and at the same time quicken the development of the local municipal bond market, a one-stone, two-bird move,” he said.

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