BEIJING (Reuters) - China's Cabinet has approved plans to allow local governments to directly issue 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 debts.
A quota management system for local government debt will be set up, the government said, as China moves to clean up local government finances and reduce their dependence on land sales for revenues.
The bond market plans were part of detailed list of reforms for 2014 that was posted online on Tuesday by the National Development and Reform Commission (NDRC), the country's top economic planner, and approved by the state council.
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.
At present local governments have limited legal options for fund raising, but have proven nimble at exploiting loopholes. In addition to selling land to raise funds, they have created local government investment vehicles (LGFVs) which have gone to the bond and loan markets to raise funds.
The LGFVs raised funds in bond and loan markets, and quickly acquired a reputation for being opaque. Some analysts estimate that local governments now owe up to US$4 trillion (S$5 trillion) - 42 per cent of China's GDP - much of it raised through LGFVs.
Much of those funds were raised after the global financial crisis in 2008-2009, and economists fear many of them focused on investments in real estate and in industries that now suffer from massive overcapacity, such as solar and shipping.
Under a pilot programme being run by the Ministry of Finance, the ministry sells bonds on behalf of selected local governments subject to a quota of 350 billion yuan (S$70 billion) in 2013. So far there have been no new issues in 2014, and the direct issuance scheme would likely replace the pilot entirely.
Other reforms canvassed in the NDRC guidelines included repeating commitments to a more market-oriented exchange rate, cutting red tape and deepening energy reforms.
