China local gov't bonds surge in Q1: report

Bonds issued by China's local government financing vehicles (LGFVs) surged in the first quarter of this year as urban construction continued to boost government demand for funding, local media reported Friday.

LGFVs, or companies set up by local governments to raise funds and bypass restrictions on direct government financing, floated 71 bonds in the first quarter, up from 54 during the same period last year, the Shanghai Securities News reported.

A total of 84.5 billion yuan (13.5 billion U.S. dollars) was raised through the bond issuance, up 35 percent year-on-year, the report said, citing figures from the Shenzhen-based Pengyuan Credit Rating Co., Ltd.

Bond financing through LGFVs is a significant fundraising tool for local governments and will stay at a high level this year, Zhou Yuanfan, vice president of Pengyuan Credit Rating, was quoted as saying.

"China is still in a stage of major urbanization and significant funding is needed for urban construction, particularly for the 36 million low-income housing units the government plans to build in the 2011-2015 period," said Zhou.

China bans local governments from borrowing directly from banks and has only allowed four developed regions, including Shanghai and Guangdong, to issue bonds directly on a trial basis last year.

A lack of direct financing channels has forced local governments to circumvent the rules by setting up thousands of LGFVs to raise funds.

A total of 399 LGFVs issued 512 bonds and raised 671.3 billion yuan as of the end of March this year, according to Pengyuan Credit Rating.

It said LGFVs collected 173.5 billion yuan from the bond market in 2011, setting a record high.

Local governments have been under greater financial pressure as the sagging property sector curbs income from land sales, while ambitious plans for low-income housing construction cry for investment.

The central government has been on alert over the growth of local government debt, but has also assured investors that risks are controllable.

China's auditing agency said last year that local government debt totaled about 10.7 trillion yuan at the end of last year, accounting for about 27 percent of China's gross domestic output in 2010.

The possibility of the central government exercising tighter control over LGFVs may reduce the scale of LGFV bonds to a certain extent in the second half of this year, the Shanghai Securities News quoted an unnamed market source as saying.

China will step up regulation of LGFVs and strictly control new local government debt to defuse potential risks, Finance Minister Xie Xuren said in March.