State Council would set quota system on debt, but only under strict conditions
China may allow local governments to sell municipal bonds under narrow parameters in a moveto regulate their borrowing and reduce systemic risk.
Qualified provincial-level governments that win approval from the State Council, the country'scabinet, will be able to raise some of the funds needed for construction projects through bonds, ifa draft amendment to the Budget Law is approved by the top legislature.
The draft amendment, which was submitted on Monday tothe National People's Congress Stading Committee, setsstrict conditions for such debt issues.
The scale of any debt issue must be within the quotasapproved by the NPC as well as local legislatures. Debtproposals will only be approved if there is a stable revenuestream to cover repayments, and proceeds of such issuescan't be used for current expenditures.
Except under these conditions, local governments may notissue bonds or provide a guaranty to any institution orindividual.
Officials found to be directly responsible for illegal bondissues will be dismissed, the draft said.
It's the first time for the nation to formulate explicit rules andsupervisory principles for local government bond sales.
The current Budget Law, which is some two decades old,bars most debt issues by local governments.
But governments at all levels have managed to raise funds in recent years through bank loans orvia local government financing vehicles to pay for a plethora of infrastructure projects.
A survey by the National Audit Office found that as of June 30, 2013, local government debtand contingent liabilities surged to about 17.89 trillion yuan ($2.9 trillion), a 67 percent rise fromthe previous estimate of 10.7 trillion yuan at the end of 2010.
Much of this debt, especially that raised through LGFVs, poses a systemic risk because of itsopacity, said Liu Jianwen, head of the Fiscal and Economic Law Research Center at PekingUniversity.