Ratings agency urges more local govt bond offerings

A domestic credit ratings agency has urged the central authorities to allow local governments to sell at least 3 trillion yuan ($488.4 billion) in bonds this year to replace existing debt incurred by financing vehicles.

That would represent a massive increase, however, since the central government last year only provided a quota of 400 billion yuan for local government bond sales.

Han Wei, vice-president of China Chengxin International Credit Rating Co Ltd, told China Daily on Thursday the figure is based on the amount of outstanding bonds, commercial paper, medium-term notes and other debt securities issued by local government financing vehicles.

Provinces, cities, counties and other jur is dictions established more than 10,000 LGFVs to fund infrastructure projects as a way to get around the 1994 budget law's ban on regional authorities directly issuing bonds.

The National Audit Office said that as of mid-2013, local governments had racked up a massive 17.9 trillion yuan of debt, of which just 1.75 trillion yuan was raised on the public bond market.

This year, 2.8 trillion yuan in debt falls due, and LGFVs also have to repay 558.7 billion yuan of bonds, according to NAO statistics.

To tackle rising risks from the sector, local governments have adopted a strategy of "opening the front door while blocking the side doors", meaning the replacement of the massive LGFV debt with longer-maturity bonds that bear lower interest rates.

The State Council said on Oct 2 that LGFVs may no longer raise funds for local authorities, and that the local governments have no obligation to repay debt that was not incurred to fund public projects.

The market is still grappling to understand the consequence of the policy directive. Some believe that the government will not entirely close the door to one-off LGFV borrowing, because direct bond issues cannot replace the existing debt.

"The huge shortfall means the old fund raising channels cannot be shut down at the moment," Han said.

Market observers doubt that the quota will suddenly be raised to 3 trillion yuan. A quota of 700 billion yuan to 1 trillion yuan is more likely, many said.

The government is trying to draw clear boundaries between municipal and corporate debt. Local governments were ordered to report their total liabilities to the Finance Ministry by Monday, but the results have not been disclosed.

Han said after the government determines which debts will be repaid by governments and which will not, new debt must be clearly identified as "government debt" or otherwise at the time of the transaction.

LGFVs could still issue bonds, but those that are not initially categorized as "government debt" would be treated as purely corporate bonds.

Han also said that a high-profile local government bond default is unlikely this year, but there may be some "credit accidents" involving repayment difficulties.