Local govt bonds are poised for approval

Liu said Monday's draft marks a breakthrough in that it establishes detailed procedures and criteria for local government bond sales.

"Since local government bond sales have become a prominent issue, it is wiser to regulate them than to ignore them," he said.

But Liu warned that the draft may lead to "underhanded doings" among government officials if local governments squabble over debt quotas.

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Under Monday's draft, the State Council will be responsible for mapping out an overall debt plan and submitting it to the national legislature for approval. Qualified governments would then divide the debt pie among themselves and submit the quotas to local legislatures for approval.

Lawmakers could decide whether to put the draft to a vote as early as Wednesday. If the vote is postponed, the draft would be opened to public comment.

Jia Kang, director of the Research Institute for Fiscal Science under the Ministry of Finance, said it is significant that the third draft again mentions the conditions for allowing local governments to raise debt, unlike the second draft, which omitted those provisions.

The first draft amendment, proposed in December 2011, deleted the clause in the current law that banned local governments from raising debts and added that "necessary" debts could be raised with the approval of the State Council, with a designated quota.

However, when the second draft amendment was discussed in June 2012, those sections were deleted, which appeared to close the door to local debt funding.

"The back-and-forth movement shows that the central government, and society at large, are very cautious over the matter," Jia said. "Now they're back to discussing conditions, which in itself is an important change."

He said that if local governments are allowed to raise debt through market channels such as municipal bonds, many LGFVs will fade from the scene, while some will assume specific roles such as "project companies".

Song Li, a researcher with a think tank at the National Development and Reform Commission, said that if municipal bonds, which usually have long maturities and low rates, could replace the current financing vehicles, it would help solve the "maturity mismatch" issue.

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