Fitch backs China local government debt limits

Draft legislation submitted by China's cabinet to set limits on local government borrowing would be positive for local government's credit-worthiness, rating agency Fitch has said.

The limits would be based on a transparent and consistently enforced formula -- as opposed to being determined on an ad hoc basis, Fitch said in a report sent to Xinhua on Friday.

The proposed legislation was submitted to China's top legislature on Aug. 24, and was approved on Saturday.

This is a due procedure under China's new Budget Law, which stipulates that an approved limit is necessary to rein in local government debt. After the overall ceiling is determined, the central government can allocate limits for each provincial-level region.

Fitch said it signals a commitment by the Chinese authorities to bolster the borrowing framework for local government as part of a broader debt reform initiative.

The intention is to develop a local government debt market where sub-national authorities are able to issue bonds directly and swap debt from off-balance-sheet local government financing vehicles, Fitch said.

On Thursday, Chinese Finance Minister Lou Jiwei said China's top legislature has approved the expansion of a debt swap program for local governments in 2015.

The bond-for-debt swap program for local governments will be expanded to 3.2 trillion yuan (500 billion U.S. dollars) from 2 trillion yuan. China in March, and then in June, granted a quota of 2 trillion yuan under which local governments could issue new low-cost bonds to replace high-yielding legacy debt.

In addition, new local government bonds worth 600 billion yuan in 2015 was also approved, Lou said, adding that the move will help ease pressure on local governments to pay debts.

The bond-for-debt swap program allows local governments to convert their debt to low interest bonds, a move aimed at easing local governments' debt burden without disrupting the broader economy.

China is trying to rein in local government debt caused by unbridled borrowing during an investment and construction binge beginning with the global financial crisis in 2009.

Local government debt stood at around 10.9 trillion yuan at the end of June 2013, according to the National Audit Office.

Under the old version of China's budget law, local governments were banned from issuing bonds. But in practice they sought back doors to raise funds by taking loans from banks and issuing bonds via their local government funding vehicles. The money has been unsupervised.

The new budget law allowed governments of the 32 provincial-level regions on the Chinese mainland to borrow within a quota set by the State Council. But the quota needs to be approved by the top legislature. Endi