NDRC plan encourages local bonds

China vowed on Tuesday to confine local government financing mainly to issuing bonds.

Under a sweeping plan by the National Development and Reform Commission (NDRC), approved by the State Council, local governments will be weaned off borrowing through financing vehicles in 2014, according to a statement posted on the central government's website on Tuesday.

Financing vehicles are usually companies that help local governments to borrow so that they can bypass laws that generally ban governments from directly soliciting credit.

As a solution, China will create a financing system for local governments that will let the sale of municipal bonds be a major source of funding for governments, said the statement.

It said the country would set limits - or quotas - on the amount of debt that can be raised by local governments, and authorities will monitor risk and handle emergencies.

"The policy has been talked about several times, so the market is now waiting for details, in particular how the quotas will be set," Reuters quoted an unnamed senior trader at a major Chinese State-owned bank in Shanghai as saying.

"I don't think the central government will immediately let local governments issue lots of bonds and endanger the overall financial system," the trader said.

Many local governments are reliant on financing vehicles as they often need money to fund projects.

Default risks have built up during the expansion of local government debt due to poor management and a lack of supervision.

A State audit of local governments' debt in December showed they owed a total of $3 trillion as of June 2013.

As part of the central government's effort to expand the financing pool for debt-mired local governments, China will be allowing more provinces and cities to directly sell municipal bonds, a pilot program that has been put in place since late 2011, the Wall Street Journal reported on Monday, citing unidentified sources.

Tuesday's statement did not refer to the above plans, though many analysts have said that the only viable, long-term solution for China with regards to its local government debt problem is to develop a thriving municipal bond market.

Other reforms canvassed in the NDRC guidelines included repeating commitments to a more market-oriented exchange rate, cutting red tape and deepening energy reforms.

"We should seize this time window when the overall price level is stable to actively push price reforms in resource products and sectors including transportation, telecommunications, pharmaceutical and healthcare industries," the NDRC guidelines read.