THE NATIONAL DEVELOPMENT and Reform Commission, China’s top economic planning agency, has chipped in its two-fen-worth on the country’s local-government debt problem, saying that debt levels overall are under control but it will curb the “disorderly expansion” of further debt.
All much as would be expected. But what caught this Bystander’s eye was the NDRC’s suggestion that some of the local government captive commercial investment vehicles used to get round restrictions on direct borrowing by provincial and municipal governments would be allowed to issue bonds to replace high-short-term debt carrying high interest rates.
That is perfectly sensible financial management but it also marks a radical advance in what has been cautious steps in broadening bond issuance. It may suggest the strains on the financial system, and particularly the shadow banking system, which would be the most likely source of high-interest debt, are more acute than is being publicly acknowledged.
China has called a halt to an experiment launched last October that let local authorities issue bonds directly. The provision permitting it was dropped from the draft budget law for its second reading earlier this week. State media quote Hong Hu, deputy director of the National People’s Congress’s law committee saying, “Considering the rapidly growing scale of local debt, attention must be paid to the accompanying problems and potential risks.”
Local authorities’ debt was 10.7 trillion yuan ($1.7 trillion), approaching 30% of GDP, as of the end of 2010, according to a June 2011 official audit, the first time the numbers were made pubic. While China’s local government debt bomb has concerned central government for some time, the roll-back follows a review of local government’s captive commercial investment companies. These take local government obligations off-balance sheet, and mostly put them in a murky world of local property development. These investment vehicles have raised 330 billion by issuing corporate bonds so far this year, compared to total new issuance of 300 billion yuan in the whole of last year.
With 28% of the local-government debt issued as part of the stimulus introduced in the wake of the 2008 global financial crisis falling due this year and next, Beijing is increasingly aware of the risks of bond defaults, particularly at a time when it is seeking to expand its capital markets, including the muni-bond market, as part of broader financial reform. The World Bank has warned of systemic risk.
The finance ministry will continue to issue bonds on local authorities behalf. That issuance will reportedly increase fivefold to 250 billion yuan this year. The draft budget law includes a loophole that would let local authorities issue bonds with specific permission from the ministry, an indication that direct issuance will be reconsidered once the clear and present danger has passed.