Local govt debt under review to prevent risks

Ability to honor debts under review to prevent risk of defaults

The credit status of local governments is being evaluated to gauge debt-paying capacity amid their growing financial demands.

The evaluation, by Dagong Global Credit Rating, was welcomed by financial analysts as a measure to regulate vast local government debt and prevent defaults.

The assessment uses a rating system unveiled by Dagong in Beijing on Monday.

The system is the first to evaluate local government debt globally using an alternative method to that used in the West, according to Guan Jianzhong, president of the rating agency.

The global financial crisis caught many institutions in the West off guard, and this system will help gauge the ability to repay debt and not just the debt itself. "Local governments are normally not aware of their repayment ability," Guan said at a news conference.

"Some local government financing vehicles are taking out new loans to repay old ones, as their profits cannot even cover financing costs," he said.

Local governments, barred from directly selling bonds or taking bank loans, have set up more than 6,500 companies, known as financing vehicles, to raise money for projects.

Official data on local government debt stood at 10.7 trillion yuan ($1.72 trillion) by the end of 2010. A report by Changjiang Securities estimated the figure might have grown to 12 trillion yuan by the end of 2012, citing the 320 billion yuan investment in infrastructure and 900 billion yuan urban development investment in the last two years.

On Dec 31 the Ministry of Finance launched a notice to "limit the irregular financing of local governments", after the banking regulator called in November for tougher regulations on infrastructure investment.

Changjiang Securities said such measures would result in a bottleneck for local government financing in the first half of 2013, and some projects may have to seek financing in the debt market.

Jin Hainian, vice-president of a research institute at Dagong, said local authorities have shown an interest on having their credit rated by Dagong.

Although the client list cannot be made public, there are around 50 local governments, including those at provincial, city and county level, currently in touch with Dagong, Jin told China Daily on Monday.

The agency evaluates the credit status of local governments based on a number of factors and not just focusing on fiscal revenue and expenditure.

The system also has global clients, mostly foreign local governments who are interested in attracting Chinese investors, Jin said.

Zhao Quanhou, head of financial research with the Fiscal Science Research Center, which is affiliated to the Finance Ministry, said credit rating for local authorities can be another tier of control.

In a previous interview, Zhao said the Ministry of Finance is currently working on a system to gather information about local government debt and may set a cap on the ability of local governments to raise debt.

"Internal controls by the Finance Ministry and the external credit rating can help tackle the issue," Zhao said.

However, he suggested, a major problem for the "external supervision" would be the difficulty for a credit rating agency to acquire detailed information of a local government.

In fact, Dagong wasn't the only credit agency looking at local government.

Zhang Zhijun, general manager of China Lianhe Credit Rating, said his company had been in touch with Shanghai and Zhejiang province on their credit rating when the Ministry of Finance launched a pilot program to allow independent debt issuance in these areas.

"But it didn't work out because the debt, in case of default, was still paid by the Finance Ministry and there was little demand for local authorities for credit rating," Zhang said. "The local governments are like subsidiaries of the central government, who is the parent company. The debt of a subsidiary will always be covered by the parent company."

However, he said he believed credit rating can still play a role in regulating local debt, as they can decide the bond yield revealing the credit risks of the issuers.