China targets local debt with regional bonds

Oct 20, 2011, 12:35 GMT

Beijing - China on Thursday announced a pilot scheme for local governments in four of the nation's most prosperous regions to issue bonds designed to help tackle their growing debt problems.

The Ministry of Finance said the State Council, or cabinet, approved the direct issue of bonds by authorities in the cities of Shanghai and Shenzhen and the provinces of Zhejiang and Guangdong.

The four regions have been at the heart of China's economic growth over the past 20 years and are home to many of the nation's key export-oriented manufacturing bases.

Local governments have tried to sustain growth by supporting state-led investments in major property and infrastructure projects, borrowing directly from state banks or guaranteeing the banks' loans to government-controlled investment corporations.

The national audit office estimated that about 6,500 local government-backed investment corporations owed a combined 10.7 trillion yuan (1.7 trillion dollars) at the end of last year.

Some international economists have estimated the total local government debt at up to 30 per cent higher than the official figure.

The government's Xinhua news agency said the bond issues by the four southern regions were 'expected to ease their financial strains and curb the fast-spreading debt risks.'

Many private businesses in the four regions have also been hit by a credit crunch in the past few months as the government has reined in bank lending in a bid to cool inflation and overinvestment.

The restriction of state banks' lending has reduced investment in land and construction, squeezing the supply of money entering legal or underground shadow banks.

Many smaller private businesses had relied on shadow banks for cash flows and investments, and the cutting of their funding has already caused a private-sector financial crisis in some cities, most notably Zhejiang's Wenzhou city.

After Premier Wen Jiabao visited Wenzhou this month, he promised to improve the banking climate for small businesses, which have also been hit by rising costs for labour and materials.

Wen asked banks to lend more to small firms and 'tolerate higher levels of debt.' He also ordered local officials to crack down on the 'high-interest informal lending market,' state media reported.

Liu Mingkang, the head of the China Banking Regulatory Commission, on Wednesday admitted that a lack of supervision of local government financing vehicles had 'created some hidden risks.'

But Liu said some analysts and ratings firms had underestimated the government's ability to solve the problems.

'The State Council and the [banking] regulator have pre-emptively assessed the risks for local government loans, property loans and shadow banking,' Liu said on the commission's website.

'We have adopted effective measures,' he said. 'The risk is controllable.'