China Mulls Using Muni Bonds for Local Projects From 2016

By Bloomberg News

China is considering requiring provincial governments finance ongoing projects solely through municipal bond sales after Dec. 31, 2015, according to a draft document circulated by the Ministry of Finance.
The proposed rules don’t specify requirements for future projects, according to the document seen by Bloomberg News. Provincial fiscal departments would need to submit reports identifying outstanding local borrowings to the ministry by Jan. 5, 2015. Regional authorities could apply to sell municipal bonds to refinance liabilities they’re identified as having, or could use fiscal funds, the document says.
China has been seeking to rein in local government borrowings after an official report showed regional debt swelled 67 percent from the end of 2010 to 17.9 trillion yuan ($2.9 trillion) as of June 30 last year. The State Council announced plans on Oct. 2 to
ban additional borrowing via local government financing vehicles as it steps up efforts to control risks to the financial system.
“The rules will help slow growth in local government debt,” said Li Ning, a bond analyst at Haitong Securities Co., the nation’s second-biggest brokerage. “After the expansion slows, credit risks of the borrowings will decline too.”
The government will reduce the number of LGFVs, which won’t be allowed to borrow money that increases outstanding local debt, according to the document.

Record Debt

Pressure to refinance is forcing the vehicles to issue record amounts of notes. They sold 1.3 trillion yuan of bonds since Dec. 31, the most in the same period since at least 1999, according to data compiled by Bloomberg on so-called chengtou securities issued by the units.
China’s towns and cities have used more than 10,000 financing vehicles to sell securities after they were barred from directly issuing bonds under a 1994 budget law. The nation’s legislature passed amendments to that law at the end of August that lay the legal framework for allowing local governments to raise funds through direct note issuance.
Credit concerns are escalating as property prices fall, state banks increase bad loan provisions and at least 10 trusts have been struggling to meet payments since May.
Shanghai Chaori Solar Energy Science & Technology Co. (002506) marked China’s first onshore corporate bond default in March when it missed a coupon payment. Closely held developer Zhejiang Xingrun Real Estate Co. collapsed the same month under 3.5 billion yuan of debt.
The proposed rules, which Reuters reported on earlier, come as policy makers pursue an about 7.5 percent growth target for 2014 that would be the slowest expansion since 1990. Chinese firms have the most debt globally after increasing borrowings to $14.2 trillion as of Dec. 31, surpassing the U.S.’s $13.1 trillion, Standard & Poor’s said in a June report.
“In the long term, it will help prevent unorderly expansion of local government borrowings,” said Cao Yang, a senior analyst at Shanghai Pudong Development Bank Co. “And it should help safeguard stability in the financial system.”