October 20, China has given the OK to the municipalities of Shanghai and Shenzhen and the provinces of Guangdong and Zhejiang to trial issuing bonds for the first time, as the authorities in Beijing look to control the debts racked up by local governments’ lending vehicles.

The State Council, China’s cabinet, will allow the 4 local governments to sell 3 and 5-year bonds at single interest rates on a trial basis, according to web portal Sina. Local governments normally issue debt through the central government.

A limit for the amount of debt that can be sold will be set by the cabinet, while the Ministry of Finance will pay interest on securities issued this year, according to Bloomberg.

Since a 1994 budget law, local governments have been prohibited from issuing bonds directly. That led to the creation of local lending vehicles to raise financing for construction projects -- as well as a debt mountain estimated at RMB 10.7 trillion at the end of 2010, according to the national auditor.

Local government debt has troubled investors in recent years, and in May Standard & Poor’s said that as much as 30% of those liabilities may sour.

Analysts said the trial would pave the way for more local governments to issue bonds from some point next year.

Source:21cbh