China mulls bond sales by local govts

China's top legislature is considering giving a greenlight to bond sales by provincial-level governments, under strict conditions.

A draft revision to the country's budget law tabled for the third reading at the bimonthly session of the National People's Congress (NPC) Standing Committee, proposes that authorized provincial-level governments will be able to issue bonds within a quota set by the State Council, China's cabinet, and approved by the NPC or its standing committee.

Money raised by the bond sales could be used to partly finance construction investments that have been included in the provincial-level governments' general public budget plans, it said.

No other forms of debt raising by local governments and their subordinate organs would be allowed under the draft revision. Furthermore, local governments and their subordinate departments should not provide debt guarantees for any institutions or individuals, under the proposals.

In addition, stable capital sources should be put in place for the repayment of government debts raised by the bond issuing, and the money borrowed could not be used in recurrent expenditures.

China's current budget law came into effect in 1995. It explicitly banned local governments from issuing bonds unless the law and the State Council provide otherwise.

Lawmakers proposed easing the restrictions in the first-draft revision to the budget law in 2011, two years after the central government decided to issue 200 billion yuan of local government bonds on an annual basis in a bid to weather the effects of the global financial crisis and help finance local governments.

The figure increased to 250 billion in 2012, 350 billion in 2013 and 400 billion this year.

Meanwhile, as part of a pilot program, 2011 saw China approve the cities of Shanghai and Shenzhen in addition to Zhejiang and Guangdong provinces to issue bonds on their own. Jiangsu and Shandong provinces joined the program in 2013.

However, the 2012 second-draft revision of the budget law called off the amendments in the previous bill and reinstalled the original ban. Experts have said the change of course reflected China's strict attitude toward its over 10 trillion yuan of local government debts at the time.

Chinese local government debts amounted to 17.9 trillion yuan as of the end of June 2013, according to official data. Although the figure has spiked quickly, Chinese Premier Li Keqiang said in March that China's government debt risks were generally still within control.

Citing an official audit of government debts last year, Li said the country's debt-to-GDP ratio was below the internationally recognized warning line.

According to Li Fei, vice chairman of the NPC Law Committee, the underlying logic for the relaxation of the restrictions in the new bill was that some experts have suggested local governments' debt raising should be further regulated so that the process can become more legalized and transparent.

"In light of the problems exposed during the local governments' debt raising process in recent years, pertinent regulations should be made in this regard," he said.

It is rare in China for a law or an amendment to go through three readings and not be passed. One exception was the property law, which was passed in March 2007 after eight readings.

The bimonthly session of the Standing Committee of the NPC runs from Monday to Thursday.