Business / Economy

Fitch hails China's local govt bond decision

(Xinhua) Updated: 2014-05-24 16:26

BEIJING - Fitch Ratings hailed the decision by the Chinese authorities to allow local governments to issue bonds directly on their own credit profile as a "significant step forward."

The move by the Ministry of Finance (MOF) is set to help reform local and regional governments' budget management and ensure greater fiscal transparency, Fitch said in a research note on Saturday.

Fitch hails China's local govt bond decision
Fitch hails China's local govt bond decision
The ministry announced on Wednesday that four more Chinese local governments -- Beijing, Jiangxi, Ningxia and Qingdao -- had been given autonomy to issue bonds directly as part of a pilot program, bringing the total number to ten.

Initiated in October 2011, local governments of Shanghai, Zhejiang, Guangdong and Shenzhen launched the pilot. Authorities of Jiangsu and Shandong provinces joined the pilot last year.

Fitch said the new policy decision is different from a previous pilot program launched in 2009. The new move makes local governments themselves shoulder the debt servicing responsibilities while local governments could only issue bonds under control of the MOF in the old program.

Enabling local governments to issue debt has several key implications which are positive for credit, Fitch said.

First it will encourage local authorities to transfer some of their sources of financing away from local government financing vehicles (LGFVs) and off-budget financing, the rapid growth of which is a potential risk for local governments and the financial system.

In addition, taking financing away from LGFVs and shadow banking, and placing debt issuance under a clearly established central government oversight framework, will bring much greater transparency to local governments' fiscal accounts and debt, it added.

It also offers the potential for better management of the local governments' asset/liability maturities while bringing down borrowing costs, said the ratings agency.

While hailing the move as a positive step, Fitch also warned that it does not stop local governments from continuing to source funding through LGFVs and off-budget financing.

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