Bloomberg News

China Boosts Local-Government Bond Sales 25%, to ‘Clean Up’ Regional Firms

March 05, 2012

China’s Premier Wen Jiabao announced plans to increase local-government bond sales by 25 percent this year to expand home building, as regulators “clean up” finances of indebted regional authorities.

The Ministry of Finance plans to sell 250 billion yuan ($39.6 billion) of notes on behalf of local governments this year from 200 billion in 2010 and 2011, according to its 2012 budget presented to the National People’s Congress in Beijing today. The increase was required mainly for low-income housing and public-welfare projects, it said.

Wen announced last year a program to build 36 million low- cost homes by 2015 to address a widening income gap and public discontent over soaring property prices. The government will run a budget deficit of 800 billion yuan this year, or 1.5 percent of GDP, he said.

“It’s quite a neutral budget,” said Lan Shen, an economist in Shanghai at Standard Chartered Plc. “A lot of activities are still taking place at local-government level and there’s still space for expansionary policy if needed, maybe in the second half.”

The deficit compares with last year’s target of 900 billion yuan, or 2 percent of GDP, and the actual deficit of 850 billion yuan, a figure altered by the use of a so-called budget stabilization fund and shifting some local-government spending, according to the speech. The Ministry of Finance in January gave preliminary budget data indicating a 2011 deficit of 519 billion yuan, or 1.1 percent of GDP.

Debt Burden

Regional authority financing vehicles had accumulated 10.7 trillion yuan of debt at the end of 2010, with 70 percent of the borrowings due for repayment by 2015, the National Audit Office said in June.

The government started issuing securities for local authorities in 2009 to help them fund infrastructure projects as part of a 4 trillion yuan stimulus plan announced in November 2008 to cushion the economy from the impact of the global financial crisis.

Many local-government financing vehicles have used up their funds on infrastructure projects, many of them good assets, according to Xiao Gang, chairman of Bank of China Ltd., the nation’s third-largest lender by market value. While the bad- loan ratio for so-called LGFVs is below 1 percent, the lender will support affordable housing and control credit to other property sectors, he said.

The central government will control the level of new debt taken on by local governments, including setting up an early- warning system on leverage, Wen said today.

China has set an economic growth target of 7.5 percent for this year, the lowest goal since 2004, he said. Officials will aim for inflation of about 4 percent, unchanged from last year.

Vice Premier Li Keqiang, a candidate to replace Wen after a leadership transition later this year, said last month that fair distribution of such houses “is the lifeblood for success.”

--David Yong, Henry Sanderson. Editors: Sandy Hendry, Ven Ram

To contact the reporters on this story: David Yong in Singapore at dyong@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.


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