China drafts bond sale plan
Source: Bloomberg News |
August 5, 2011, Friday
|
Print Edition
Print Edition
CHINA'S finance ministry has drafted a preliminary plan that would allow some provincial and city governments to sell bonds to investors on a trial basis, a person with knowledge of the matter said.
The proposal aims to boost local authorities' repayment ability, the person said, declining to be identified as the matter is confidential. The local government liabilities fell to 7.1 trillion yuan (US$1.1 trillion) as of June 30 after banks reclassified 2.1 trillion yuan as normal corporate credit with sufficient cash flows to meet obligations, the person said.
Allowing the sale of municipal bonds may ease concerns that defaults on payments owed to lenders could lead to China's third banking bailout in less than two decades. As much as 30 percent of the credit may sour, Standard & Poor's estimated, after a record lending boom - much of it for road and airport projects - powered China's recovery from the global financial crisis.
"To avoid a bank default, we believe the authorities need to take decisive action to restructure local debt," Qu Hongbin, chief China economist at HSBC Holdings Plc in Hong Kong, wrote in a report dated Monday. "We see the issuance of municipal bonds as the best option."
Local governments, barred from borrowing debt directly, set up 6,576 financing vehicles by the end of 2010 to fund projects such as new roads and airports, according to a report from the National Audit Office on June 27. They had 10.7 trillion yuan in outstanding liabilities at the end of 2010, of which 8.5 trillion yuan was from bank loans, it said.
The management of some of these companies was "irregular" and their ability to repay debt is weak, auditor-general Liu Jiayi said at that time. The vehicles had more than 8 trillion yuan in debt overdue, he said.
Selling bonds "also opens a channel for local governments to raise funds needed for future infrastructure investment in a more transparent and market-based fashion," Qu wrote.
"Demand for local government bonds is not an issue, not least because of the huge pool of savings amassed by Chinese households."
The proposal aims to boost local authorities' repayment ability, the person said, declining to be identified as the matter is confidential. The local government liabilities fell to 7.1 trillion yuan (US$1.1 trillion) as of June 30 after banks reclassified 2.1 trillion yuan as normal corporate credit with sufficient cash flows to meet obligations, the person said.
Allowing the sale of municipal bonds may ease concerns that defaults on payments owed to lenders could lead to China's third banking bailout in less than two decades. As much as 30 percent of the credit may sour, Standard & Poor's estimated, after a record lending boom - much of it for road and airport projects - powered China's recovery from the global financial crisis.
"To avoid a bank default, we believe the authorities need to take decisive action to restructure local debt," Qu Hongbin, chief China economist at HSBC Holdings Plc in Hong Kong, wrote in a report dated Monday. "We see the issuance of municipal bonds as the best option."
Local governments, barred from borrowing debt directly, set up 6,576 financing vehicles by the end of 2010 to fund projects such as new roads and airports, according to a report from the National Audit Office on June 27. They had 10.7 trillion yuan in outstanding liabilities at the end of 2010, of which 8.5 trillion yuan was from bank loans, it said.
The management of some of these companies was "irregular" and their ability to repay debt is weak, auditor-general Liu Jiayi said at that time. The vehicles had more than 8 trillion yuan in debt overdue, he said.
Selling bonds "also opens a channel for local governments to raise funds needed for future infrastructure investment in a more transparent and market-based fashion," Qu wrote.
"Demand for local government bonds is not an issue, not least because of the huge pool of savings amassed by Chinese households."
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