Local govt bond sale program expanded: report

China will allow 10 provinces and cities to sell municipal bonds later this year, as part of an effort to broaden financing channels for debt-ridden local governments, a media report said on Monday.

East China's Shandong, Zhejiang and Jiangsu provinces, South China's Guangdong Province and two less-developed provinces in the central and western regions are on the list, the Wall Street Journal (WSJ) reported on Monday, citing people with knowledge of the matter.

Beijing and Shanghai municipalities, Shenzhen and another city on the eastern coast of China are also included, and the central government will unveil the plan later this month, with the bonds set to be issued as early as July, according to the WSJ.

The Ministry of Finance was not available for comment on Monday.

The news, if true, indicates an expansion of a pilot program that started in 2011, Liu Xiao, a senior analyst at Beijing-based Anbound Consulting, told the Global Times on Monday.

In late 2011, China started a program to allow Shanghai, Zhejiang, Guangdong and Shenzhen to sell bonds directly, within a budget plan approved by the State Council and with credit backing from the central government.

Jiangsu and Shandong were added to the list in 2013.

"Expanding the pilot program is also in line with the country's latest urbanization plan," Liu said.

A plan released in March by the State Council said that local governments would be allowed to raise money through direct selling of bonds to fund the local urbanization process.

Unlike the previous practice, the local authorities' sale of bonds may be backed by their own credit, and the interest rate will be higher than for treasury bonds in order to attract investors, while also reflecting the lower credit security of local governments compared to the central government, Liu said.

"It is likely that the local government bonds will be sold to individual investors as well as to financial institutions," he said.

"The move is intended to ease the pressure of local government debt," Han Changji, a property analyst at CIC Research Center, told the Global Times on Monday.

Direct sale of bonds will broaden local governments' financing channels, avoid potential risks from opaque shadow banking activities, and also lower the governments' reliance on revenue from land sales, Han noted.

As local governments are normally not allowed to raise money by issuing bonds, they use local government financing vehicles to borrow massively from less regulated off-balance-sheet sources, which has led to swelling debts and greater risk of default.

The real estate market has been cooling since early this year, sparking growing concerns about defaults.

Annual growth in new home prices fell to an 11-month low in April, and second-hand home prices slumped month-on-month in 22 of 70 major cities in April, compared with 14 in March, official data showed on Sunday.

"Cities with high [property] inventories will see further declines in home prices. The land market will cool and land prices will soften. Some developers and local governments will face greater financial strains," Barclays Capital told the Global Times in a research note on Monday.

Local authorities rely heavily on revenue from land sales to repay their debts, which stood at 17.9 trillion yuan by the end of June 2013, up 67 percent from 2010, official data showed.

Part of the problem is that local governments have to incur new debts in order to repay old ones, which further inflates the existing debt, Han said.

In the case of a bond default, the local governments will have the obligation to repay investors with fiscal revenues or through selling local assets, and bond investors will have to take on default risks too, he said.