In a report submitted to the 13th Finance Ministers' Meeting of the Asia-Pacific Economic Co-operation (APEC), held in Viet Nam earlier this month, Chinese Finance Minister Jin Renqing mentioned that the central government is considering the possibility of authorizing local governments to issue their own bonds under certain conditions.

Though the idea has long been discussed at various levels of government and academia, analysts said this was the first time a high-profile financial official has ever made any formal comments on the matter.

A State bond issued by local governments, or local bond, involves a complex set of problems that could not be settled under the current legal and administrative mechanisms.

The financial affairs of local governments are under the strict supervision of the Budget Law, which stipulates that local governments do not have the right to issue bonds. But despite these stipulations, local governments have already incurred deep debts in the last several years in their thirst for capital.

Since the country resorted to a proactive economic financial policy in the 1990s, government expenditure has been boosted remarkably. Most of these investments were put into basic infrastructure, like highways, which are highly capital-intensive projects.
Figures show that more than 40 percent of China's county governments are running deficits. The total debt of township governments has exceeded 500 billion yuan (US$63.3 billion) by now.

Liu Shangxi, a researcher from the Research Institute for Fiscal Science under the Ministry of Finance, told China Business News that the debts for all government branches, including central government and local governments at various levels, stood at 12.45 trillion yuan (US$1.57 trillion) in 2004, 91.18 percent of the country's GDP for the same year.

The huge amount of debts for local governments is formed in several ways other than local bonds.

Local governments borrowed a lot of capital. Quite a large amount of capital collected from State bonds issued by the central government was lent to local governments.

On top of that, local governments also assumed debts when the State-owned enterprises (SOEs) within their jurisdiction went bankrupt, as they were representatives of the owner.

Given the already huge sum, issuing local bonds would help bring the various debts into a single, unified form, which will facilitate public supervision as well as official auditing.

A financial department insider also admitted that the local bonds would be inevitable, because local governments need them.

However, the local bonds are far from a magic medicine for the heavy-loaded local governments, experts said.

"The local bonds could only ease the financial pressure of local governments in the short term," Zhao Quanhou, a researcher from the Research Institute for Fiscal Science, told China Business News. "The primary source of income for local governments is still taxes they collect."

Experts suggested that the money pooled through the local bonds should be used to improve people's lives instead of spent on the namesake projects. It is also not proper for the government to put the money in commercial projects for profits, which would cause direct competition between the government and the people.

Of course, such bonds would not be issued unless conditions are ready.

According to researcher Li Quan, also from the Research Institute for Fiscal Science, the market economy in China is far from being mature while the credit record data for businesses and individuals are to be established. Therefore, more strict limits must be imposed to prevent the bonds' abuse.

"There should be stringent control from the central government on the growth of the local bonds if they are issued," Li told China Business News. "Such restrictions are absolutely necessary."

Experts also pointed out that the current changes in economic policy have a remarkable influence when policy-makers try to bring the local bonds into practice.

The central government is trying to cool down the economy by reining in the investment fever, restraining speculative foreign investment and stimulating the consumption demand. Against such a background, it is unlikely to allow the local bonds, which encourage investment.

In any event, pilot projects would be carried out before local bonds were officially launched across the country. The localities enlisted in such experiments are most likely to be more economically developed or rich in resources.

Zhao suggested that the cities chosen should be the provincial capitals, municipalities and developed medium-sized cities. "The governments in these cities command rich resources and have good credibility, they would have a stronger capability to pay back the bonds," Zhao said.

Thus, Zhao thinks, paying back the bonds would not be a big problem for the localities qualified to issue them. "They can pledge their income, like the fees collected on highways, for the capital."

Moreover, the pressure for paying back the bonds would force the localities to make better use of the money and consider cutting redundant employees.

(China Daily September 29, 2006)