China lawmakers may loosen local govt debt ban: Reports

SHANGHAI (Reuters) - China's legislature is considering revisions to budget law that may clear the way for local governments to raise funds directly, rather than borrowing through special-purpose vehicles, state media said, as Beijing tries to clean up opaque municipal debt.

China's economic reformers want to bring greater transparency to the roughly US$3 trillion (S$3.8 trillion) in local government debt already outstanding.

Local governments have borrowed heavily over the years in the service of investment-driven growth, but rising bad loans and bond defaults have rattled confidence, with some investors forecasting that the world's second-largest economy may be edging into a full-blown debt crisis.

The current budget law, which took effect in 1995, forbids governments from taking out bank loans or directly issuing bonds. But localities have skirted this ban by creating opaque special purpose vehicles that borrow on their behalf.

Local officials have used local government financing vehicles to finance urban infrastructure and affordable housing, but they have also been used for real estate speculation and to prop up pet firms in sunset industries, a practice economists warn could create systemic risk.

Zhu Xiaoping, former director of the legislature's finance and economics drafting committee, who was involved in earlier drafts of the budget law revision, was quoted by the official Shanghai Securities News saying that the original prohibition of local government bond issuance had become obsolete since the ban was written into law some two decades ago.

"Circumstances are different now. Local governments today are already independent budgetary bodies."

But they have also warned that allowing opaquely managed local governments to tap bond markets directly would do little to help the situation in the absence of other reforms, and the government has vacillated on the issue, alternately considering revisions to the budget law then rejecting them.

State media reported that the most recent proposed amendments submitted to a regular meeting of the National People's Congress Standing Committee on Monday would establish quotas for issuance and add transparency requirements regarding revenue streams, as well as specifying punishments for officials found responsible for illegal bond issues. "This kind of regulation is providing a basis for closing the door to backdoor fundraising and striving to open the front door," said an unnamed local government official quoted by the Shanghai Securities News.

China implemented a pilot programme in 2011 that allows six local governments to conduct their own bond auctions and the Finance Ministry also conducts bond auctions on behalf of other select local governments. The programme operates under a quota, which was raised to 400 billion yuan (S$80.5 billion) in 2014, up from 350 billion yuan in 2013.