Monday, May 26, 2014

China to Allow Municipal Bonds Again?

ON MAY 21st China’s finance ministry released details of a new scheme to allow ten wealthy localities in China—Shanghai, Beijing and Guangdong among them—to issue bonds directly for the first time in two decades. Although a small pilot scheme has allowed a few cities and provinces to issue bonds in the past, in practice the federal government issued them on their behalf. So the new scheme of municipal bonds is a radical departure.

The shift comes as China’s leaders increasingly fret about the mountains of local debt that have built up despite the restrictions put in place 20 years ago. Back then party leaders in Beijing were concerned about how recklessly municipal governments were borrowing. Local leaders had binged on bonds and bank lending to such an extent that a crisis loomed. Fed up with the resultant scandals and excesses, the federal government decided to solve the problem by banning local borrowing.

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