It's gaps like these that are driving China's local governments to look for loopholes that will allow them to borrow more from the public, both institutional and individual investors, in "hidden" ways. Economists call these methods "quasi" or "gray" local government bond issuance.

Many localities might try to use these methods, because the planned 200-billion bond program isn't nearly big enough to satisfy all their needs.

Less than requested

According to Li Miaojuan, head of the development and reform commission of Guangdong, the province, which contributed 13.8 percent of the nation's fiscal revenue, got a bond issue quota of 2 billion yuan to 5 billion yuan from the 200-billion-yuan plan, less than 10 percent of what it sought.

The Ministry of Finance wants more capital from the bond plan to flow to less-developed central and western regions, to narrow the gaps between the poor and wealthy regions.

For Xinjiang, the quota is 5.5 billion yuan -- 3 billion yuan to be issued ob Monday and the remaining 2.5 billion set for July. For Sichuan Province in the southwest, which sustained massive damage from last year's earthquake, the quota is 20 billion yuan.

Unclear risk

According to Jiang Hong, researcher on public economy and management with the Shanghai University of Finance and Economics, the "quasi" local government bonds are issued mainly in two ways: local-government-backed corporate bonds and trust products secured by local governments.

Sun Ziduo, head of the economics research institute under the Anhui Academy of Social Sciences, said usually local governments issued their own debt, with companies as the issuers on their behalf.

Statistics from the NDRC show that from the fourth quarter of 2008 to date, there were 45 corporate bond issues in China that raised more than 130 billion yuan. Most of them were backed by local governments. It's here that the gray area becomes a potential issue.

In December, Shanghai's Urban Construction Investment and Development Corp. (Shanghai Chengtou), issued 3 billion yuan in debt on behalf of the municipal government. The five-year bonds pay 3.95 percent annually, with the proceeds intended for the construction of municipal utilities.

Subsequently, Beijing Infrastructure Investment Co., Ltd. issued 2 billion yuan worth of five-year bonds, with the support of the municipal government. The proceeds are intended to support urban infrastructure.

As noted, local governments are banned by a 1995 law from issuing their own debt. Under a second 1995 law on bond guarantees, local governments are also banned from guaranteeing corporate debt issues. The laws were intended to strengthen the central government's macroeconomic control capacity by centralizing the management of local revenue and spending.

But in both cases, the companies that issued the debt are local government companies. Thus, it's unclear where default risk ultimately lies.