Moody's: China Makes Progress in Local Gov't Bond Market

Moody's said Wednesday that China granting two more provinces greater autonomy in bond issuances marked an important step forward in the country's management of local government debt.

The Ministry of Finance extended its pilot program for local government bond markets to Jiangsu and Shandong provinces on July 4, increasing the number of participants to six.

The six provinces and municipalities now have more freedom to market their own bonds as well as issue them in their own name -- practices other local governments may not carry out.

Under current law, local governments can only borrow in the form of financing vehicles, but these shell vehicles can only obtain loans by offering high yields, as they often have no assets or stable profits.

"The momentum is building towards China's central government granting local governments the ability to borrow directly, which could ultimately lead to greater transparency and more refined fiscal policies for these entities," Moody's said in an announcement.

The rating agency said it believes a direct form of borrowing would enhance the central government's ability to monitor and regulate the debts of local governments.

Local government debt surged during the investment and construction binge that came amid a stimulus that was launched to buffer China against the global financial crisis in 2008.

As a huge proportion of debt-financed projects have not generated any cash flow since then, local government debt, which China's National Audit Office estimates at around 10 trillion yuan (US$1.63 trillion), poses a threat to China's slowing economy.

Moody's said direct borrowing would also enhance local governments' accountability for their own investments and discourage them from engaging in irregular financing activities.