Bloomberg News

China Local Governments Can Raise Money to Repay Debt for Homes

September 29, 2011

(Updates with bond sale plans in second paragraph and economist’s comments in third.)

Sept. 30 (Bloomberg) -- China’s local governments can repay debts taken on by city and provincial financing vehicles as it encourages them to build affordable homes in cities where housing prices are high, the central government said.

Banks can lend to financing vehicles of municipalities that have been “cleaned up” or those that can pay back their debts by themselves, it said in a statement on its website. The companies can also sell bonds to finance the program, it said.

China plans to build 10 million units of affordable housing this year as home price gains threaten affordability. The State Council urged local governments to increase supply of economic housing, a category of affordable homes, in cities where home prices are “relatively high,” according to the statement.

“The reiteration of supporting affordable housing itself says it all: top policy makers will not ease tightening policies on the housing market any time soon,” Li Wei, a Shanghai-based economist for Standard Chartered Bank, said in an e-mailed reply.

New home prices climbed in all 70 cities monitored by the government for the first time in August from a year earlier, undercutting government efforts to cool the market.

‘Financial Risks’

Local governments had total debts of 10.7 trillion yuan as of last year, according to a national audit released in June. Social housing, education and health care made up 9.5 percent of the money used, compared to 37 percent for city infrastructure, the audit said. A total of 42 percent of the debt is due to be repaid this year and next year, it said.

Local governments are not allowed to give guarantees to the financing vehicles to allow them to raise funds. In some cases local governments had illegally used their guarantee to allow the companies to raise money, the audit said.

“The borrowers and local governments should ensure they pay the loans on time, to prevent financial risks and debt risks,” today’s statement said.

County-level governments that want to invest to build public rental homes can use the provincial government to repay debts, and use a provincial level financing vehicle to raise funds, it said. Loans should not be longer than 15 years, and should be no lower than 0.9 times of the government benchmark lending rate, it said.

--Henry Sanderson. With assistance from Bonnie Cao in Shanghai. Editor: Andreea Papuc, Linus Chua

To contact Bloomberg News staff on this story: Henry Sanderson in Beijing at hsanderson@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net


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