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Municipal bonds trial 'credit positive' for China: Moody's
By Lydia Chen |
October 24, 2011, Monday
|
Online Edition
Online Edition
CHINA's first step in allowing local governments to issue bonds is credit positive for the country, Moody's said today.
The Ministry of Finance said last Thursday it would start a trial program to allow four selected local governments, including Shanghai, Shenzhen, Guangdong and Zhejiang provinces, to issue bonds for the first time.
The move is meant to narrow financing shortfalls and prevent debt defaults by overextended provinces.
In addition to generating benefits for local governments seeking direct access to capital market funding, this step toward the eventual development of a municipal bond market is credit positive for China's central government and would likely enhance fiscal transparency and discipline, according to the Moody's weekly credit outlook report.
The pilot program diversifies financing sources for local governments and, if successfully developed, promises to reduce local governments' reliance on banks for funding infrastructure programs. Since capital market investors will demand more detailed information and disclosure, Moody's expects improved public-sector transparency and fiscal discipline, the report said.
The numerous financing vehicles set up by local governments after the global financial crisis in 2008, have mired these authorities in a total debt of about 10.7 trillion yuan (US$1.7 trillion), equal to 27 percent of the country's gross domestic product last year, the national audit office said at the end of 2010.
Most of the financing vehicles were formed to support construction projects to spur the country's post-crisis economy. The financing vehicles owned by local governments are due to repay total debts of about 1 trillion yuan annually starting from this year till 2013, and an outbreak of defaults could peak during the period, China International Corp warned in an earlier note.
Issuing local government bonds would go some way towards helping local governments honor their obligations.
The huge amount of on- and off-balance sheet debt owed by the local government would ultimately be a contingent liability on the central government's balance sheet, Moody's cautioned in today's report.
The Ministry of Finance said last Thursday it would start a trial program to allow four selected local governments, including Shanghai, Shenzhen, Guangdong and Zhejiang provinces, to issue bonds for the first time.
The move is meant to narrow financing shortfalls and prevent debt defaults by overextended provinces.
In addition to generating benefits for local governments seeking direct access to capital market funding, this step toward the eventual development of a municipal bond market is credit positive for China's central government and would likely enhance fiscal transparency and discipline, according to the Moody's weekly credit outlook report.
The pilot program diversifies financing sources for local governments and, if successfully developed, promises to reduce local governments' reliance on banks for funding infrastructure programs. Since capital market investors will demand more detailed information and disclosure, Moody's expects improved public-sector transparency and fiscal discipline, the report said.
The numerous financing vehicles set up by local governments after the global financial crisis in 2008, have mired these authorities in a total debt of about 10.7 trillion yuan (US$1.7 trillion), equal to 27 percent of the country's gross domestic product last year, the national audit office said at the end of 2010.
Most of the financing vehicles were formed to support construction projects to spur the country's post-crisis economy. The financing vehicles owned by local governments are due to repay total debts of about 1 trillion yuan annually starting from this year till 2013, and an outbreak of defaults could peak during the period, China International Corp warned in an earlier note.
Issuing local government bonds would go some way towards helping local governments honor their obligations.
The huge amount of on- and off-balance sheet debt owed by the local government would ultimately be a contingent liability on the central government's balance sheet, Moody's cautioned in today's report.
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