China Moves to Help Local Governments Roll Over Debt

China Moves to Help Local Governments Roll Over Debt

Change Will Allow More Short-Term Debt Issues

Oct. 23, 2013 12:14 p.m. ET

SHANGHAI—China took a significant step Wednesday to deal with an explosion of borrowing among local governments by allowing more of them to issue short-term debt to help pay off maturing bonds and loans, according to a person with direct knowledge of the matter. Economists estimate local governments may have borrowed as much as $5 trillion in recent years to  und projects and keep the economy humming as Beijing scaled back the stimulus efforts it had undertaken following the global financial crisis. Concerns are rising that the buildup of debt has been too rapid and that local governments will be unable to pay the money back. Beijing has warned, too, about the potential risks, and is trying to understand and contain any potential problem.Wednesday’s move comes just weeks before a widely anticipated national audit of local government debt designed to uncover just how much banks and investors have lent to local governments. China’s National Audit Office last counted the country’s local government debt at the end of 2010, when it put the figure at 10.72 trillion yuan ($1.76 trillion), or 27% of gross domestic product. Economists say it could have risen to 60% today.

Because of long-standing rules that prohibit local governments from running deficits or borrowing, such governments have created companies called local government financing vehicles, which get around the restrictions by issuing bonds themselves.

Under the new plan, for the first time local state-owned enterprises with a triple-A credit rating and local government financing vehicles with a double-A or above rating will be able to sell bills that are repaid in typically 270 days, said the person, the shortest-term bills they have ever been allowed to issue.

“The planned move will benefit local government financing vehicles’ effort to expand their refinancing channels and will particularly help satisfy their short-term funding needs,” said Cai Huan, senior manager at Qilu Securities’ financial products division.

In the past, large funds and securities firms have been the big buyers of local government debt. The shorter-dated debt may appeal to an even wider group of investors, and many funds can invest only in debt maturing in less than a year.

Allowing another channel for raising cash should help these entities roll over existing longer-term debt as a large number of securities mature and local governments need to pay back investors. Still, it will only delay potential problems.

Officials at the National Association of Financial Market Institutional Investors, a central-bank-backed industry group that has put together the new plan, couldn’t immediately be reached for comment.

China rolled out this program in December 2010 as a pilot project with only triple-A-rated state-owned firms directly overseen by China’s central government qualifying to use the shorter-term fundraising tool. It was aimed at the country’s Railway Ministry and nine large state-owned companies, including PetroChina Co. 601857.SH -1.15% and China TelecomCorp. CHA -3.81%

Since then, the borrowings by local government vehicles have been growing quickly, with new bonds issued by these entities rising last year to 1.09 trillion yuan ($179 billion) from 400 billion yuan a year before, data from WIND Info show.

Analysts say Beijing could be on the hook for a significant portion of that debt if it goes bad, and yields on many of the bonds reflect the expectation that the central government would back the bonds. If the debt is backed by Beijing, they argue, it should be considered part of China’s national debt, pushing that total to a worrisome 200% of GDP, up from 129% at the end of 2008, according to Fitch Ratings.