China's local governments can swap out of pricey debt: FinMin

[August 28, 2014]  BEIJING (Reuters) - China's local governments can swap some of their high-interest debt for cheaper municipal bonds, Finance Minister Lou Jiwei said, a move that may help defuse risks around the country's $3 trillion local debt pile.

In a speech in parliament about China's fiscal system, Lou said China will control the amount of money borrowed by its regional governments by ensuring that all their debt is accounted for in their budgets.

Regional governments, responsible for the bulk of China's public spending but getting less than their share of total fiscal income compared to the central government, have relied on borrowing heavily in recent years to stay viable.

To ease the financing pressure, Lou said governments that are stuck with expensive debt can replace them with cheaper municipal bonds - subject to approvals - to lower their interest payments. No further details were given.

This is the first time that a senior Chinese official has said publicly that local governments can swap their debts to temper repayment costs.

A national audit of public finances last year showed China's regional governments owed a total of $3 trillion as of the end of June 2013.

"For debt where financing costs are high, local governments will be allowed to apply to have the debt replaced by municipal bonds to lower their interest burden," Lou was quoted as saying on the website of the Ministry of Finance.

His comments were made on Wednesday but became public only on Thursday.

REVISING THE FISCAL LAW

Lou's remarks came as China's rubber-stamp parliament meets this week to review proposed amendments to the country's fiscal law to let regional governments issue bonds for themselves.

If the revised law is passed - which may happen as early as this week, according to some local Chinese reports - it would help China to score a reform victory that analysts say is vital for cleaning up the country's messy public finances.

Under existing laws, regional Chinese governments cannot borrow directly from any party to instill fiscal discipline.

But strapped for cash, governments have skirted the rules by setting up separate companies known as "local government financing vehicles" that borrow on their behalf.

These opaque financing vehicles, whose activities are not accounted for in state budgets, powered the spike in China's local government debt levels in the past four years.

Underscoring authorities' intent to shut down such illicit fund raising, Lou said these vehicles will be stripped of their fund-raising function for regional governments.

As most of $3 trillion borrowed by governments had been used to fund non-lucrative public works such as parks and roads, many analysts fret that a significant slice of the debt may sour as local governments struggle to find the cash for repayments.

Policymakers have restructured the loans behind the scenes in an effort to avoid rattling China's financial system with a wave of bad debt. Loans that were due were rolled over, or in some cases repayment deadlines were pushed back.

(Reporting by Koh Gui Qing; Editing by Shri Navaratnam)

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