China's top legislators are considering giving the go-ahead for local governments to issue bonds, a move to help finance the nation's US$586 billion stimulus package.

On Feb 18, a high-level meeting of the National People's Congress Standing Committee reviewed a State Council proposal to allow local governments to issue bonds. No details were given but experts say the National People's Congress, the nation's top legislature, is likely to approve the proposal during its annual session this March.

The proposal, once approved, would end a decade-long debate on whether local governments should get more fiscal leeway, despite the enormous debts they accumulated over the years. But how to assure the proceeds from the debt issuance are well spent remains a question.

Caijing, a Chinese magazine, reported earlier the central government would allow local governments to issue bonds of up to 200 billion yuan this year. The central government itself will issue 750 billion yuan treasury bonds, as it plans a budget deficit of 950 billion yuan for 2009.

The record high deficit, nine times 2008's, comes as part of the government's efforts to jack up investment and cope with the global economic slowdown. China announced a US$586 billion stimulus package last November, for 2009 and 2010, of which the central government would shoulder one-third. Local governments, banks, and private investors are expected to chip in for the rest. But a slump in the real estate sector and the ensuing decrease in land sales mean local governments have little fiscal surplus to pay their parts of the stimulus bill.

According to the Ministry of Finance, the government's deficit amounted to 111 billion yuan in 2008. But the total deficit of local governments amounted to 672.8 billion yuan in the first nine months of 2008, roughly 3 percent of the nation's economic output during the period.

But some analysts say such fiscal difficulty is only one side of the story.

"Government revenue is already more than enough now," said Ma Yu, a senior researcher with the China Society of Economic Reform. "The money they already had hasn't been spent well. So why bother to issue debts?"

The government administrative cost grew 147 times from 5.29 billion yuan in 1978 to 777.9 billion yuan in 2006. In contrast the nation's GDP only expanded 58 times from 358.81 billion yuan in 1978 to 20.94 trillion yuan.

Zhu Lijia, a researcher with the China National School of Administration estimated in 2006 that the government spent more than 900 billion yuan on overseas tours, vehicle use and dining each year.

How local governments could secure the return on the debts is also still a question.

Under current law, local governments are not allowed to issue debts directly. But many have bypassed the prohibition by setting up State-backed investment arms to acquire credit and issue debts.

"It's much more convenient for local governments to raise money through State-owned firms and trusts," Zhang Hanya, a senior researcher with the National Development and Reform Commission, said earlier.

"The proposal to loosen the limits is part of a long-term reform, rather than a measure to finance the nation's stimulus package," said Zhao Quanhou with the Research Institute for Fiscal Science under the Ministry of Finance. "Presently few local governments will likely want to resort to it, given the proposal's rigid requirements."

According to Zhao, local governments will need to meet strict regulatory requirements to issue bonds directly, including revealing the status of their debts and revenues.

"Some local governments have poor balance sheets. If they reveal their books, no one would agree to lend," said Zhao.

The total debt held by local governments was estimated to be more than 1 trillion yuan, or 4 million yuan for each township-level government, according to a study by the Development Research Center of the State Council.

(China Daily March 2, 2009)