Less than requested

According to Li Miaojuan, head of the development and reform commission of Guangdong, the province, which contributed 13.8 percent of the nation's fiscal revenue, got a bond issue quota of 2 billion yuan to 5 billion yuan from the 200-billion-yuan plan, less than 10 percent of what it sought.

The Ministry of Finance wants more capital from the bond plan to flow to less-developed central and western regions, to narrow the gaps between the poor and wealthy regions.

For Xinjiang, the quota is 5.5 billion yuan -- 3 billion yuan to be issued Monday and the remaining 2.5 billion set for July. For Sichuan Province in the southwest, which sustained massive damage from last year's earthquake, the quota is 20 billion yuan.

Unclear risk

According to Jiang Hong, researcher on public economy and management with the Shanghai University of Finance and Economics, the "quasi" local government bonds are issued mainly in two ways: local-government-backed corporate bonds and trust products secured by local governments.

Sun Ziduo, head of the economics research institute under the Anhui Academy of Social Sciences, said usually local governments issued their own debt, with companies as the issuers on their behalf.

Statistics from the NDRC show that from the fourth quarter of 2008 to date, there were 45 corporate bond issues in China that raised more than 130 billion yuan. Most of them were backed by local governments. It's here that the gray area becomes a potential issue.

In December, Shanghai's Urban Construction Investment and Development Corp. (Shanghai Chengtou), issued 3 billion yuan in debt on behalf of the municipal government. The five-year bonds pay 3.95 percent annually, with the proceeds intended for the construction of municipal utilities.

Subsequently, Beijing Infrastructure Investment Co., Ltd. issued 2 billion yuan worth of five-year bonds, with the support of the municipal government. The proceeds are intended to support urban infrastructure.

As noted, local governments are banned by a 1995 law from issuing their own debt. Under a second 1995 law on bond guarantees, local governments are also banned from guaranteeing corporate debt issues. The laws were intended to strengthen the central government's macroeconomic control capacity by centralizing the management of local revenue and spending.

But in both cases, the companies that issued the debt are local government companies. Thus, it's unclear where default risk ultimately lies.

Jiang and Ai said that most all local governments had issued debt in such disguised ways, but it was difficult to estimate the scale of these debts. However, Jiang said, local governments were keen to issue debt. In March alone, Beijing, Shanghai and Guangdong issued medium-term bills on the interbank market, raising 25 billion yuan. The issues were made through similar means as those described above.

Another "gray area" is trust products. CITIC Trust, a private company, issued 3 billion yuan in three-year trust products to finance infrastructure construction, rail transport, water and environmental protection projects in the northern city of Tianjin.

Jiang said that there were no unified criteria defining what sort of company was allowed to issue "quasi" local bonds.

There was also regulatory risk, because the guarantees were technically illegal.

All these gray areas and loopholes helped expose investors in "quasi" local bonds to latent default risks, especially in the absence of a credit assessment system, Jiang noted.

"It's difficult for investors to analyze credit risks of such bonds, because they are often sold through private placement instead of public bidding," he added.

(Xinhua News Agency March 27, 2009)