[May 20, 2014]BEIJING (Reuters)
—
China's cabinet signaled on Tuesday it is closer to
letting local governments directly sell bonds for the
first time and said it would phase out opaque financing
vehicles that are thought to have built up trillions of
dollars of high-risk debt.
In a sweeping statement, the country's top economic planner, the
National Development and Reform Commission (NDRC), said Beijing
would deliver stable economic growth whilst pursuing reforms.
The promise to stay focused on reforms would appease critics who
worry China's enthusiasm for bringing about painful changes may be
on the wane as its economy stumbles.
The uncertain outlook for the world's second-largest economy was
underscored on Tuesday by remarks from a senior Chinese trade
official, who said the country has a tough road ahead if it wants to
meet its 7.5 percent trade growth target this year.
Yet the NDRC said in a statement on its website that enacting change
is a "first priority" for the government and hopes to make
breakthroughs this year in key areas.
On fiscal reform, which caused a market stir on Tuesday after
Chinese media reported that China would allow 10 local governments
to directly sell municipal bonds, the NDRC signaled that the
government won't disappoint investor expectations.
It said China will create a financing system for local governments
that will let the sale of municipal bonds be a major source of
funding for governments.
Financing vehicles, which are set up by local governments to borrow
on their behalf so as to get around laws that prohibit governments
from borrowing directly from any parties, would also be phased out.
It said that Beijing would set limits -- or quotas -- on the amount
of debt that can be raised by local governments.
"The policy has been made talked about several times, so the market
is now waiting for details, in particular how the quotas will be
set," said a senior trader at a major Chinese state-owned bank in
Shanghai.
"I don't think the central government will immediately let local
governments issue lots of bonds and endanger the overall financial
system."
A LONG-TERM SOLUTION
According to Chinese media, China is set to allow the 10 governments
that include Zhejiang, Jiangsu, Shandong, Guangdong, Beijing,
Shanghai and Shenzhen to directly sell municipal bonds.
Tuesday's statement did not refer to the above plans, though many
analysts have said that the only viable, long-term solution for
China with regards to its local government debt problem is to
develop a thriving municipal bond market.
By allowing direct bond sales, Beijing can require higher degrees of
disclosure in prospectuses and can also allow for the distribution
of risk to a wider pool of potential investors.
Chinese local governments at present have limited legal options for
fund raising, but have proven nimble at exploiting loopholes.
In addition to selling land to raise funds, they have created local
government financing vehicles which have gone to the bond and loan
markets to raise funds.
Local Chinese governments, which are notorious for being opaque, are
estimated by some analysts to owe up to $4 trillion - 42 percent of
China's GDP - much of it raised through financing vehicles.
A state audit of local governments' debt in December showed they
owed a total of $3 trillion as of June 2013.
But despite concerns about the fiscal health of local governments,
bonds sold by their financing vehicles are still sought after by
investors. This is partly because many believe they are implicitly
guaranteed by the state, even after Beijing allowed the country's
first publicly-traded bond to default this year.
Other reforms canvassed in the NDRC guidelines included repeating
commitments to a more market-oriented exchange rate, cutting red
tape and deepening energy reforms.
"We should seize this time window when the overall price level is
stable to actively push price reforms in resource products and
sectors including transportation, telecommunications, pharmaceutical
and healthcare industries," the NDRC said.
(Reporting by Aileen Wang and Koh Gui Qing in BEIJING and Pete
Sweeney and Lu Jianxin in SHANGHAI; Editing by Kim Coghill)