Policy draft allows local governments to issue bonds
October 29, 2014 Category Finance, Weekly
A draft document circulated by the Ministry of Finance on local government debt proposes letting local governments issue bonds to replace borrowings taken through local government financing vehicles (LGFV). This would require a massive expansion of China’s fledgling municipal bond market. Regulators are struggling to manage a massive USD3 trillion of outstanding local government debt, much of it raised by LGFVs to finance infrastructure and real estate projects. This month, Beijing cut local governments’ ability to use LGFVs for future fundraising, as these have been criticized for facilitating irresponsible borrowing and investment that now is a drag on growth. Two people with direct knowledge of the draft document said the central government wants to precisely measure the amount of local government debt currently outstanding, classify it, and assign responsibility for it to appropriate government bodies. The Ministry of Finance declined to comment on the draft, which has been distributed to officials to seek opinions. Formal rules are expected to be published in a few months. China’s current quota for the municipal bond market remains extremely small at CNY109.2 billion for all of 2014.
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