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Bond model is credit-positive
By Chen Li |
September 20, 2011, Tuesday
|
Print Edition
Print Edition
CHINA'S pilot program allowing local governments to issue bonds will help them to be disciplined dealing with their debts while providing them with an alternative to raise capital, Moody's said yesterday.
The program, to start in Shanghai and the provinces of Zhejiang, Guangdong and Shandong, is credit-positive as it will enhance local governments' discipline and transparency in managing their debts, the United States-based ratings agency said in a report. Issuing this type of public debt requires more transparent disclosure of information and stronger fiscal management.
More importantly, the program will alleviate liquidity pressure by providing them with alternative sources of funding, which to date have relied heavily on bank loans to the so-called ''local government financing vehicles,'' analysts Kai Hu and Jiming Zou said in the report.
Local governments in China have accumulated 10.7 trillion yuan (US$1.7 trillion) in debts, equal to 27 percent of the country's 2010 gross domestic product, according to the National Audit Office.
Because Chinese law had previously prohibited local governments from incurring debt, various levels of local administrations had created thousands of financing vehicles as a channel to borrow from Chinese banks.
Moody's projected China's local government debt at 3.5 trillion yuan more than the auditors had estimated, potentially threatening the banks' credit ratings on an increased risk of bigger losses, according to the agency's previous report in July.
China's mountain of local government debt has long been viewed as a major risk by investors who worry that slower growth in the world's second-biggest economy may trigger loan defaults and hit its banking system.
Moody's said a jump in local government loan defaults could push the non-performing loan ratio for Chinese banks to as high as 12 percent, above its best-case scenario that see losses of between 5 percent and 8 percent.
The average NPL was 1.1 percent at the end of March, according to government figures.
The program, to start in Shanghai and the provinces of Zhejiang, Guangdong and Shandong, is credit-positive as it will enhance local governments' discipline and transparency in managing their debts, the United States-based ratings agency said in a report. Issuing this type of public debt requires more transparent disclosure of information and stronger fiscal management.
More importantly, the program will alleviate liquidity pressure by providing them with alternative sources of funding, which to date have relied heavily on bank loans to the so-called ''local government financing vehicles,'' analysts Kai Hu and Jiming Zou said in the report.
Local governments in China have accumulated 10.7 trillion yuan (US$1.7 trillion) in debts, equal to 27 percent of the country's 2010 gross domestic product, according to the National Audit Office.
Because Chinese law had previously prohibited local governments from incurring debt, various levels of local administrations had created thousands of financing vehicles as a channel to borrow from Chinese banks.
Moody's projected China's local government debt at 3.5 trillion yuan more than the auditors had estimated, potentially threatening the banks' credit ratings on an increased risk of bigger losses, according to the agency's previous report in July.
China's mountain of local government debt has long been viewed as a major risk by investors who worry that slower growth in the world's second-biggest economy may trigger loan defaults and hit its banking system.
Moody's said a jump in local government loan defaults could push the non-performing loan ratio for Chinese banks to as high as 12 percent, above its best-case scenario that see losses of between 5 percent and 8 percent.
The average NPL was 1.1 percent at the end of March, according to government figures.
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