China To Allow Deeply Indebted Local Governments To Issue New Bonds, Repay Maturing Debt

Amid fresh data showing that China’s local governments are facing mounting financial pressures, Beijing took the unusual step to publicly voice its support for local governments to issue bonds in order to roll over their debt and avoid defaults.

There has long been a troubling mismatch between infrastructure investments that may take decades to produce financial returns and the short-term loans that are often used to finance such projects. And a total of 100 billion yuan ($16.5 billion) of bonds issued by local government financing vehicles is expected to mature in 2014, according to the National Development and Reform Commission, a top central planning authority.

“If construction projects face funding shortfalls and there is no way of completing the project to realize expected revenues, we will consider granting permission for these platform companies to issue an appropriate amount of new debt,” the NDRC said in a statement (in Chinese). “The funding that is raised can be used to ‘borrow new and repay old’ and for incomplete projects, ensuring that they will not end up half-finished.”

China’s provinces and municipalities haven't been allowed to borrow money directly or run a budget deficit since 1994, when Beijing introduced a ban due to concerns that local authorities were building up huge debts they couldn't repay. But companies set up by local governments, often called local government financing vehicles, can raise funds through the more-traditional methods of taking bank loans, issuing bonds, and via equity market initial public offerings, as well as via shadow banking activities such as trust loans.

The latest government debt audit arrived on Monday and showed that local government liability had swollen to around 17.9 trillion yuan ($2.95 trillion) at the end of June.

The new estimate, disclosed in a statement on the National Audit Office website, represents a nearly 70 percent increase from the 2010 tally of $10.7 trillion yuan. The latest figure is equivalent to a little more than 30 percent of gross domestic product, compared to 25 percent of GDP three years ago.

China’s top government auditor has pledged to watch levels of debt and spending closely to ensure the country’s fiscal stability.

“We will look at fiscal sustainability, especially local government risk prevention and control,” Liu Jiayi, head of the National Audit Office, said in a speech posted to the agency’s website. The office will also audit all officials in “key regions, departments, agencies” at least once during their terms and conduct checks of government spending on conferences, meetings and office buildings, he said.

China's just-ended Central Economic Work Conference also emphasized that "preventing and controlling local-government debt" will be among the major tasks to be implemented next year.