THE National People’s Congress (NPC), China’s parliament, has formally approved changes to the budget law allowing local governments to issue bonds directly, a reform that could help stabilize government financing by creating the country’s first municipal bond market.

    Regulators have already experimented with allowing local governments to issue debt directly through a pilot program under way. The amendment to the budget law that the NPC passed Sunday would certify the pilot and provide a legal basis for later expansion.

    The National Audit Office estimates local governments owed 17.89 trillion yuan (US$2.91 trillion) as of the end of June and says nine Chinese provinces failed to pay back some 800 million yuan in debt due in March.

    As economic growth slowed, that situation apparently caused regulators to move faster on developing alternative funding channels for local governments, given estimates that a fifth of local government debt is set to come due in 2014.

    The Chinese Government is worried that funding pressures on local governments would exacerbate their reliance on land sales for revenue, something that has caused social disruption as governments evict residents to sell land to developers.

    Minister of Finance Lou Jiwei said in an interview published on official websites Sunday that he believed the local government debt situation had stabilized this year.

    “Of course we can issue some new bonds, and we can pay off some old bonds, but the total amount [of outstanding debt] hasn’t clearly expanded, the total risk is controllable,” he said.

    The Central Government has been struggling to find a way to make local governments more fiscally responsible after they ran up massive debt in the years following the global financial crisis, in many cases using opaque local government financial vehicles (LGFVs), which are now at risk of collapse, to get access to bank credit.

    Economists are worried that systems currently in place encourage local officials to over-invest without regard for returns, in the name of supporting economic growth at all costs.

    The new law allows governments to issue bonds to fund projects for the public good but not to fund day-to-day operations. It also requires them to publish prospectuses to explain their debt condition and how they will use the funds.

    The Ministry of Finance has granted 10 local governments quotas to issue a combined 109.2 billion yuan of municipal bonds this year.

    Governments in Shanghai, Zhejiang, Guangdong, Shenzhen, Jiangsu, Shandong, Beijing, Qingdao, Ningxia and Jiangxi are included in the pilot scheme. Most have already conducted their first issuance, starting with Guangdong Province, which sold a 14.8 billion yuan issue in June.(SD-Agencies)