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The finance ministry said the governments in
Shanghai, Zhejiang, Guangdong, Shenzhen, Jiangsu, Shandong,
Beijing, Qingdao, Ningxia and Jiangxi will be part of a pilot
program that allows officials to sell and repay their own debt.
In an earlier financial reform framework announced by the
National Development and Reform Commission, municipal bonds were
included as part of reform plans. Wednesday's announcement is
the first detailed plan for implementing the program.
This is a significant break from the past as under China's
current laws, local governments are prohibited from borrowing
from any parties.
Yet, the law has been ineffective in containing public debt
levels as officials have skirted the rules by creating opaque
financing vehicles that borrow on their behalf. A government
audit published in December showed Chinese governments owe a
total of $3 trillion.
Many experts say the only long-term solution to China's
government debt problem is the creation of an active municipal
bond market, a recommendation that Beijing appears to be taking
on board.
The finance ministry said in statement on its website that local
governments involved in this experiment would be responsible for
repaying their own debt. This is unlike in the past when the
ministry would sell bonds on behalf of local governments and was
thus also responsible for repayments.
The value of bonds that can be sold must be within an annual
limit decided by China's cabinet, the ministry said. Any
government that fails to sell as many bonds as it is allowed to
in a year cannot carry their unused quotas into the next year.
For 2014, China has said that local governments can sell 400
billion yuan worth of bonds, so the value of municipal bonds
that the 10 governments can sell under this experiment is
expected to count towards the 400 billion yuan limit.
The municipal bonds, which can either be sold via auctions or be
underwritten by banks, must have maturities of five, seven and
10 years and sold in the proportion of 40 percent, 30 percent
and 30 percent, respectively.
Further, local government bonds must be rated by ratings
agencies and the prices of central government bonds must be used
as the benchmark when pricing municipal bonds.
The launch of this new bond experiment comes at a time when
China is trying to revise its budget law to allow governments to
sell bonds. But the process, which has been frustrated in the
past by fiscal conservatives who blocked any changes, is
expected to be a long one.
(Reporting by Koh Gui Qing and Shao Xiaoyi in BEIJING and Lu
Jianxin in SHANGHAI; Editing by Jacqueline Wong)
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