(Adds details, quotes)
BEIJING May 20 China's cabinet signalled on
Tuesday it is closer to letting local governments directly sell
bonds for the first time and said it would phase out opaque
financing vehicles that are thought to have built up trillions
of dollars of high-risk debt.
In a sweeping statement, the country's top economic planner,
the National Development and Reform Commission (NDRC), said
Beijing would deliver stable economic growth whilst pursuing
The promise to stay focused on reforms would appease critics
who worry China's enthusiasm for bringing about painful changes
may be on the wane as its economy stumbles.
The uncertain outlook for the world's second-largest economy
was underscored on Tuesday by remarks from a senior Chinese
trade official, who said the country has a tough road ahead if
it wants to meet its 7.5 percent trade growth target this year.
Yet the NDRC said in a statement on its website that
enacting change is a "first priority" for the government and
hopes to make breakthroughs this year in key areas.
On fiscal reform, which caused a market stir on Tuesday
after Chinese media reported that China would allow 10 local
governments to directly sell municipal bonds, the NDRC signalled
that the government won't disappoint investor expectations.
It said China will create a financing system for local
governments that will let the sale of municipal bonds be a major
source of funding for governments.
Financing vehicles, which are set up by local governments to
borrow on their behalf so as to get around laws that prohibit
governments from borrowing directly from any parties, would also
be phased out.
It said that Beijing would set limits -- or quotas -- on the
amount of debt that can be raised by local governments.
"The policy has been made talked about several times, so the
market is now waiting for details, in particular how the quotas
will be set," said a senior trader at a major Chinese
state-owned bank in Shanghai.
"I don't think the central government will immediately let
local governments issue lots of bonds and endanger the overall
A LONG-TERM SOLUTION
According to Chinese media, China is set to allow the 10
governments that include Zhejiang, Jiangsu, Shandong, Guangdong,
Beijing, Shanghai and Shenzhen to directly sell municipal bonds.
Tuesday's statement did not refer to the above plans, though
many analysts have said that the only viable, long-term solution
for China with regards to its local government debt problem is
to develop a thriving municipal bond market.
By allowing direct bond sales, Beijing can require higher
degrees of disclosure in prospectuses and can also allow for the
distribution of risk to a wider pool of potential investors.
Chinese local governments at present have limited legal
options for fund raising, but have proven nimble at exploiting
In addition to selling land to raise funds, they have
created local government financing vehicles which have gone to
the bond and loan markets to raise funds.
Local Chinese governments, which are notorious for being
opaque, are estimated by some analysts to owe up to $4 trillion
- 42 percent of China's GDP - much of it raised through
A state audit of local governments' debt in December showed
they owed a total of $3 trillion as of June 2013.
But despite concerns about the fiscal health of local
governments, bonds sold by their financing vehicles are still
sough after by investors. This is partly because many believe
they are implicitly guaranteed by the state, even after Beijing
allowed the country's first publicly-traded bond to default this
Other reforms canvassed in the NDRC guidelines included
repeating commitments to a more market-oriented exchange rate,
cutting red tape and deepening energy reforms.
"We should seize this time window when the overall price
level is stable to actively push price reforms in resource
products and sectors including transportation,
telecommunications, pharmaceutical and healthcare industries,"
the NDRC said.
(Reporting by Aileen Wang and Koh Gui Qing in BEIJING and Pete
Sweeney and Lu Jianxin in SHANGHAI; Editing by Kim Coghill)