Oct 10

China Watch Blog has learnt that Zhejiang Province in eastern China will issue 8 billion yuan (US$1.25 billion) worth of bonds to fund infrastructure this year, as part of the central government’s trial programme to allow local governments to sell bonds directly.

The issuance, consisting of 50-percent three-year bonds and 50 percent five-year bonds, has been ratified by the central government, according to the provincial government, the People’s Daily reported.

The money will be used to fund city-level and county-level infrastructure projects that are under construction, especially low-income housing projects, said Qian Juyan, head of the Zhejiang Provincial Department of Finance. New projects will be strictly controlled from getting the fund.

It is unclear when exactly the government will issue the bonds. However, it is a beginning of a shift in how local government’s projects are financed.

According to China’s budget law, local governments are prohibited from issuing bonds on their own. But they set up special investment platforms to raise fund. In 2009, the Ministry of Finance introduced a program that it issued bonds on behalf of local governments.

Qian said the finance ministry has selected two provinces and a municipality to participate in the trial in order to explore new financing channels for local governments.

The move came amid increased concerns that the pile-up of local debt under the investment vehicles faces risks of default after local authorities borrowed heavily to help finance China’s four-trillion yuan stimulus package amid the global financial crisis since 2008.

According to the National Audit Office, the debts of local governments stood at a little more than 10.7 trillion yuan (about US$1.67 billion) at the end of last year.

The central government has reiterated orders to clean up local debt and regulate local borrowing, and urged banks to refrain from providing loans to local governments for unapproved projects and vehicles to prevent debt increases.

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