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China Eases Rules on Bond Sales by Local Governments

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Sept. 1 (Bloomberg) -- China laid the legal framework to let more local governments sell bonds directly to raise funds for projects of public interest after top lawmakers passed an amendment to the country’s Budget Law.

Under quotas approved by the State Council, local authorities can sell debt to invest in such projects. Bond sales to finance day-to-day expenditures remain prohibited, along with all forms of credit guarantees to individuals or entities, according to a statement issued yesterday by the standing committee of the National People’s Congress in Beijing.

President Xi Jinping vowed to make policy changes to the nation’s tax and budget systems at a Communist Party meeting in November last year as local borrowings jumped 67 percent from the end of 2010 to 17.9 trillion yuan ($2.9 trillion) in June 2013. Almost 40 percent of this came from off-budget funding through financing vehicles.

The revision has “solved the problem of borrowing money” for local governments, Finance Minister Lou Jiwei said at a briefing in Beijing yesterday. For those governments as of the end of 2013, “there were some new borrowings and repayment of old debts, but the overall size has not expanded obviously. The overall risks are under control.”

The revision of the legislation provides a legal framework to supervise local government debt, Lou said.

Financing Vehicles

The law initially passed in 1994 banned local governments from selling bonds, forcing them to set up thousands of financing vehicles to raise money for infrastructure projects. The regional administrations are responsible for about 80 percent of spending, while receiving only 40 percent of tax revenue under the current tax-sharing system, according to a World Bank estimate.

“China is rolling out its most wide-ranging fiscal reforms since 1994,” Zhong Liang, a Hong Kong-based credit analyst at Standard & Poor’s Ratings Services, said on Aug. 27. “These important policy changes should press local governments to rationalize their spending and reduce their capacity to aggressively borrow. Off-budget local borrowing will be gradually phased out.”

The Politburo of the Communist Party approved a general plan on June 30 to change the existing fiscal and tax system as part of the broad reform plan mapped out at the party’s Third Plenum in November. Priorities include improving supervision of government budgets and building a modern budget system. The plan is looking to complete the most important jobs by 2016, and achieve the goal by 2020.

The Ministry of Finance started to allow the cities of Shanghai and Shenzhen as well as Zhejiang and Guangdong provinces to sell municipal bonds in 2011 as part of a trial program. It added Shandong and Jiangsu provinces in 2013.

This year’s trial expanded to Jiangxi province, Ningxia region, and the cities of Beijing and Qingdao, as the ministry started to require disclosure of basic financial information and credit ratings.

To contact Bloomberg News staff for this story: Helen Sun in Shanghai at hsun30@bloomberg.net

To contact the editors responsible for this story: James Regan at jregan19@bloomberg.net Darren Boey, Greg Ahlstrand