Business

China allows local government bond sales to repay debt

Yuan notes
Image caption There have been growing concerns about the amount of bad loans held by local governments

China has given permission to four local governments to sell bonds for the first time in 17 years, in a move to help them pay their debts.

The Ministry of Finance said authorities in Shanghai, Zhejiang, Guangdong and Shenzen will be allowed to issue bonds on a trial basis.

The move comes amid growing concerns about the ability of the local governments to repay their debts.

Local government debt stood at 10.7tn yuan ($1.7tn; £1.1tn) last year.

"This is part of a very complicated process of improving the finances of local government," Stephen Joske of the Economist Intelligence Unit told the BBC.

"It will help ease the current government debt crisis but is not enough by itself to solve the issue," he added.

Poorly managed?

According to the China Banking Regulatory Commission (CBRC), local government debt was 80% of total bank lending in China at the end of last year.

A large part of these loans was extended by government-owned and controlled banks to local authorities during the global financial crisis in a bid to sustain growth.

While they did help to keep China's economy growing strongly, there have been concerns that non-performing loans now pose a serious threat to the economy.

On Wednesday, Liu Mingkang, chairman of the CBRC acknowledged these concerns.

"It is undeniable that local government financing platforms have not been prudently managed," he said.

"A lack of monitoring mechanisms and other problems have created a number of risks."

However, Mr Liu added that the overall risks of government debt were manageable and assured that the commission would impose strict controls on government borrowing.

'Good investment'

The four local authorities will be allowed to issue three-year and five-year bonds to raise money.

While there have been concerns about the huge amount of debt held by the local governments, analysts said the bond sale is likely to generate a lot of interest.

"They could actually turn out to be a good investment. You just have to look at the projected growth rates of China to realise that," said Mr Joske.

He explained that investors' confidence may also be boosted by the fact central government will play a key role in issuing the bonds.

The finance ministry is expected to keep a tight control on the sale and also oversee interest payments.

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