Guangdong helps kick off new era

China's municipal bond market may begin next month, with 10 local governments expected to issue debt on their own for the first time.Part of Guangdong's bond issue will be used in infrastructure development, including the new high-speed railway to link Guangdong and Guangxi Zhuang autonomous region. Gong Pukang / For China Daily

Province is the first to appoint credit agency for independent debt issue

A new era in China's municipal bond market may begin as early as next month, with a limited number of local governments issuing debt on their own for the first time.

Guangdong province invited bids for a credit rating agency on Monday. The winner among the nine bidders was Shanghai Brilliance Credit Rating & Investors Service Co Ltd.

Recruitment of underwriters will begin as early as June 9, China Business News reported.

Guangdong has the second-largest bond quota of 14.8 billion yuan ($2.36 billion) this year, after the 17.4 billion yuan granted to Jiangsu province.

According to the Ministry of Finance, 10 provinces and cities will share the quota for 2014, which totals 109.2 billion yuan.

Apart from Guangdong, no other region has yet taken concrete steps toward an issue.

The program is the latest expansion of a pilot program that started in 2011, which was designed to give local governments more freedom in borrowing. Previously, local government bonds were guaranteed by the central government, which also made the debt payments.

Another part of the new borrowing system is the requirement for credit ratings. In a speech late last year, Finance Minister Lou Jiwei said that local governments' bond issues should be built on a sound credit rating system to contain both the scale and risk of the debts.

"By introducing credit ratings and information disclosures, China can better manage local debt and motivate local governments to control borrowing," according to a research note by China Chengxin International Credit Rating Co Ltd, a local partner of United States-based Moody's Investors Service.

China's local government debt amounted to 17.9 trillion yuan in mid-2013, up from 10.7 trillion yuan at the end of 2010, according to a national audit. "It is a general trend to open up the local government bond market," China Chengxin said in a report.

However, some experts raised concerns over the accuracy and effectiveness of China's credit rating companies, citing inflated ratings given to bond issuers.

According to a draft credit rating list for the eligible bond-issuing regions prepared by Pengyuan Credit Rating Co, six of the 10 local governments were rated AA, while the rest got even higher ratings of AA+.

Liu Shangxi, deputy director of the Research Institute for Fiscal Science at the Ministry of Finance, said another problem is the mismatch between the governments that are eligible to issue bonds and those that need the money.

"County-level governments have the largest demand for financing, yet they don't qualify for debt issues. Their financing still largely relies on the provincial - and municipal-level governments. That's not much different from the old system under which the central government essentially guaranteed local government debt," Liu said.

Liu also said that the conditions are not yet ready for introducing credit ratings of local government.

He said that it's not even clear how to measure the asset values of local governments, and as there are no balance sheets available for local governments, there's no way to carry out accurate credit evaluations.

In addition, he said, there have been cases "where local governments weren't satisfied with the ratings" they received and forced the ratings agencies to upgrade them.

Given all these factors, Liu suggested, local government financing should also explore more innovative means of raising money such as public-private partnerships that would channel more private capital into government projects.