China to deepen local govt borrowing reforms

Will be allowed to auction deposits through central bank

China will further reforms for local government borrowing in 2015, Shanghai Securities News reported over the weekend, in a fresh move to allow for more financial independence for local governments amid a slowing economy.

The country first experimented with allowing local governments to directly issue municipal bonds in 2014, with a small quota of 109.2 billion yuan ($17.48 billion) for the year.

Provinces and cities covered in the pilot program to issue debt in their own names include East China's Shanghai and North China's Beijing municipalities, East China's Zhejiang and Shandong provinces, and South China's Guangdong Province.

The report did not reveal whether the experiment will be expanded across the country this year.

The establishment of a sound local municipal bond market is considered a key move in tackling the buildup of local government debt.

In October 2014, the State Council, the country's cabinet, published rules to strengthen the supervision and management of debts incurred by local governments, the first of its kind intended to manage and control risks posed by local government debt totaling trillions of yuan.

The State Council required the establishment of an integrated management mechanism for local government debt, which is expected to cover borrowing, use of funds, and repayment.

The State Council's statement came one month after the National People's Congress (NPC), the Chinese parliament, passed a long-awaited set of amendments to the country's Budget Law on August 31, 2014.

The revision marked an important milestone in fiscal reforms and paved the way for local governments to formally issue bonds on China's bond market.

The old version of the budget law banned local governments from issuing bonds. But in practice they sought backdoors to raise funds by taking loans from banks and issuing bonds via their local government funding vehicles. The money borrowed was unsupervised.

In another step in developing the country's municipal bond market that would wean local governments off their dependence on external financing vehicles, more local governments have been authorized to auction deposits through the central bank, Reuters reported on February 3, citing sources it did not identify.

On February 3, Shanghai's municipal finance bureau announced that it would auction 40 billion yuan in six-month deposits in February, in what traders said would be the first such move by a local government in China.

Local governments have been able to resell deposits of their own money held in commercial banks since 2013 in search of higher returns.

In December, for example, Beijing sold a few tranches through a unit of China International Capital Corporation.

However, in the past, these deposits were mostly controlled at the central government level, which heavily restricted local governments' ability to budget independently.