Local government debt has always been seen as a time bomb ticking away beneath China’s economy.
Central authorities have tried various ways to address the issue.
In 2015, they unveiled a debt swap scheme aimed at extending the maturity of local government loans and reducing interest payments.
The Ministry of Finance has recently issued a document on plans to give investors easier access to local government bonds.
Many regions have relied on infrastructure spending to bolster economic growth, a strategy that has resulted in local governments accumulating huge debt piles.
Such a growth strategy is not going to change any time soon, and that means the size of local government debt is going to get bigger.
Last year alone, local governments issued bonds worth a combined 6.05 trillion yuan (US$880.4 billion), up more than 57 percent from 2015, according to data from China Bond Rating.
It is estimated that the debt issuance size of local governments this year will reach 6-7 trillion yuan, including 5-6 trillion yuan of bonds issued for swapping existing debt and 1 trillion yuan of new bonds.
Under current rules, non-financial institutions and individual investors have limited access to local government bonds. But this is going to change.
The Ministry of Finance said authorities are studying the interbank market with the aim of allowing non-financial institutions and individuals to invest in such assets.
However, the low return of local government bonds may only appeal to conservative investors.
Meanwhile, central authorities have been promoting public-private partnership (PPP) in infrastructure projects.
If private companies and local governments could issue bonds jointly to raise funds, that would help promote the PPP model as well as ease the financial burden of local governments.
In view of all these initiatives, the local government debt issue may gradually be resolved.
This article appeared in the Hong Kong Economic Journal on Feb. 24
Translation by Julie Zhu
[Chinese version 中文版]
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