China To Get A Muni Bond Market

In the wake of the Asian financial crisis a decade ago, China dabbled with issuing local government debt to fund local projects. Come another financial crisis, and the idea is being dusted down again.

Officials have reportedly been discussing a tentative plan to sell some 200 billion yuan ($29 billion) of bonds through the Finance Ministry this year to finance provincial and municipal stimulus spending on infrastructure projects such as airports, power plants and railways. Six provinces and municipalities,  including Beijing, Shanghai, Tianjin and Chongqing, have been earmarked to lead the experiment, according to the South China Morning Post.

Local governments’ fiscal revenues fell 2.7% to 316.7 billion yuan in January (central government’s were down 28.4%), the finance ministry has reported, thanks to tax cuts and a slowing economy. Land sales, a mainstay of local government budgets, have also dried up, leaving provinces and cities strapped for cash, and relying otherwise on city and provincial-owned companies to raise bank loans. This mechanism could mask local government debt equivalent to 10% to 20% of GDP on some estimates, similar to central government debt’s share.

The proposed bond issues would make this debt more transparent, and may have a life long after the current crisis — and the need to pump prime the economy — has passed.

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