Reshape Local Fiscal Disciplines with Bond Market
On May 21, the Ministry of Finance issued 2014 Local Government Autonomous Issuance and Repay of Bond Trial Measures, stating that in 2014, Shanghai, Zhejiang, Guangdong, Shenzhen, Jiangsu, Beijing, Jiangxi, Ningxia and Qingdao will be the pilot cities or provinces for autonomous issuance and repay of bond of local government. The core of the Measures is to set up a system for the issuance, interest payment and capital repay of local government bonds within the issuance scale approved by the State Council.
In recent 5 years, the scale of local government bonds has become bigger and bigger. In 2009, the Ministry of Finance began issue local bonds; and in 2011, 4 regions were allowed to directly sell bonds (but shall repay through the Ministry of Finance) and then the pilot region was expanding. And until now, several local governments are allowed to directly sell and repay the local bonds. This is a meaningful step for local governments’ financing.
And why local government bond is necessary? Simply, because local governments are lack of money and are in need of new financing channels. In earlier days, local government preferred to raise money from banks. They use land as collateral to borrow from the banks through various finance platforms, which now become the main components of current local government debts.
Bank credits have various disadvantages since the loaning policies, beside that influenced by the economic cycle, are strictly limited and constrained by regulators. In 2011, the National Audit Office audited the debts of local government,
which directly resulted in the severe shrinking of their financing capability from banks. Bank credit can easily lead to maturity mismatch of local financing with handling short term loans with long term investment, which may causes financial risks when economic cycle comes. After that, non-standardized loan asset financing tools such as bank wealth management products and trusts become the major approaches for local government financing. However, these two years, regulators also took measures to sort out the non-standardized loan assets and consequently the space for local government financing became even narrow.
In this context, since 2009, local governments began to expand their bond sales in the interbank market. According to the statistic data from WIND, the amount of bonds issued by local governments, including quasi-municipal bond and bond issued locally have reached 2.79 trillion yuan. In contrast, by the statistics of the National Audit Office at the end of 2013, as of June 2013, payable bank debts of local governments was only 5.5 trillion yuan. This means, bond market has become an important financing tool for local governments.
Therefore, an increasing number of experts propose to modify the current regulation that “local government shall not issue local government bonds” in the Budget Act, thus to hew the way for new financing channels for local governments. Chief economist of the Research Bureau of the PBC Ma Jun and other experts put it even further that by observance of the experience at home and abroad, they believe that the introduction of bond market and auxiliary reforms can solidify the constraints of local government budgets and improve the transparency of local finance. However, this idea also sparked objection from other experts since they hold that this will make the total amount and the risk of local debts uncontrollable.
Anyway, be it supporting or objection, the fact is that local government has already issued bonds. As we can see, the successful issuance of quasi-municipal bond in bond market is mainly because of the local government behind this financing platform. Just glance at a rating report of a quasi-municipal bond, we can easily find that the most important section is always the description of the fiscal conditions and repayment credit of the local governments. Quasi-municipal bond is in essence a local government bond. Let alone that besides quasi-municipal bond, enormous bank loans, trusts and wealth management products are all based on the credit of the local governments. Hence, as the issuance of local government bond will make risks uncontrollable, so do finance via these channels.
On the other hand, we should also understand that current local debts primarily originated from the loosening of local government financing in 2008 by the central government. Under the situation of fiscal decentralization, it became a stimulus to the local government to develop local economy. However, accompany with the positive side, local high financial leverage has initiated the overheating of economy, which will ultimately require financial centralization to handle their negative effects. In this chain of events, local debts are nothing but by-products of the central-local game. Central government should not and will not be able to control the local government in borrowing. To solve the disorder situation of local government debts, we should start from changing the dependence of the local governments on bank financing because bank credits are severely handicapped by central policies.
And hence, bond is an ideal substitute. To bond investors, the credit of the local government, the quality of the subject project and the guarantee of the repayment are all key factors to make their bond purchase decisions. And to financial market which is dominated by institute investors, it will have even rigorous constraints on the repayment duty of the local governments and their punishment of delayed repayment and default will be more severe. Pressures from credit downgrading and bond defaults will urge local governments to tight up their pockets, improving their fiscal transparency and investment efficiency, thus to enhance the confidence of their investors.
Certainly, there is a long way to go before the local fiscal discipline is totally reshaped. Firstly, the volume of the bond should be large enough thus to prevent local government to “rob Peter to pay Paul”. Local governments should, under this situation, practically increase their finance capability.
Secondly, we should enhance the system construction of the bond market. During the 2011 pilot issuance of local government bonds, it once occurred that the interest rate of local government bond was lower than the Treasury rate but with a higher credit rating of local government against the national government. The reason behind these strange phenomenons was the craving of political image of local government as well as the unreal boosts from underwriters and tenderers, which seriously violated the rules of market oriented bond issuance.
Published on Southern Metropolis Daily | 2014-5-29
