China plans to assess local government debt

Beijing: China's central bank may conduct trial assessments of local governments' creditworthiness as officials prepare for debt sales by provincial and city authorities, a state researcher said.

Staffers from the People's Bank of China (PBOC) and Chinese Academy of Social Sciences (CASS) are planning to carry out the tests this year, said Liu Yuhui, director of a financial research office at CASS. Researchers in his office will probably assign credit ratings for the central bank's internal reference to assess how much a province or city should be able to borrow, Liu said in an interview in Beijing yesterday.

China is letting some cities and provinces sell bonds directly after in October ending a ban that prompted local governments to set up thousands of financing arms to fund roads, bridges, and sewage plants. As the government grapples with the threat of loans turning bad from a record expansion of credit in 2009 and 2010, officials aim to limit future risks.

"The old financing-vehicle model has created lots of problems as debt was hidden from books without effective supervision," said Liu, whose office is formally known as the Financial Key Laboratory. Assessing the creditworthiness of local governments is "a necessary step," he said.

Liu said the grades would be closely linked to the fiscal standing of local governments, differing from existing credit ratings granted to local financing vehicles and their projects, he said.

The financing vehicles had accumulated 10.7 trillion yuan (Dh6.23 trillion) of debt at the end of 2010, according to the National Audit Office. The central bank, whose responsibilities include oversight of credit ratings, is one of the regulators of the nation's bond market, along with the National Development and Reform Commission and the China Securities Regulatory Commission.

Liu declined to say which central bank department is working with his office on the project. No comment was available from the central bank on the information provided by Liu.

Shanghai became the first local government to sell bonds directly since 1949 when it issued three-year bonds in November as part of a trial programme. Guangdong, on China's southern coast, Zhejiang and the city of Shenzhen have sold similar notes.

Local data

The project for assessing local government risks is government-directed and hasn't involved any independent credit-rating companies, Liu said. The research team is collecting local fiscal data and the trial will initially target provincial governments and then expand to cities and lower municipal levels, he said.

Some governments have exceeded their fiscal cap-acity by borrowing to fin-ance local projects using guarantees including future revenues from land sales.