The scale of local government bond issuance by the Ministry of Finance may exceed the previous high of 200 billion yuan to hit 250 billion yuan in 2012, and though the market expects such an increase, the final scale of bond issuance will be determined by the National People’s Congress, reports 21st Century Business Herald, citing the draft budget of Jiangxi province.

The State Council had launched a pilot program in October last year allowing the Shanghai, Shenzhen, Guangdong, and Zhejiang governments to directly issue bonds for the first time.

According to the report, the increase in the scale of local government bond issuance could ease the financing pressures faced by local governments in 2012.

The main sources of revenue for local governments are tax revenue, transfer payments by the central government, land sales, loans obtained by local government financing platforms, and the issuance of local government bonds.

According to the Ministry of Finance, revenue growth from the deed tax in 2011 fell 30 percentage points year-on-year, while that of value-added tax revenue from land sales declined 16.3 percentage points.

Revenue from land sales in 130 cities across China fell 13 percent year-on-year in 2011, according to the Soufun-affiliated China Index Academy.

Liu Shangxi, an official at the Ministry of Finance, said China does not have the capacity to allow for a large-scale issuance of local government bonds as the financial affairs of the issuers are not transparent, and this prevented investors from being able to assess the repayment abilities of local governments.

It will be challenging for China to maintain a rapid growth rate of tax revenue as economic growth is projected to fall in 2012, and local governments need to incur higher expenses for education, health care, social security, and the building of affordable homes, added Liu.

There are 13 million affordable homes under construction at present, and according to a law passed in 2009, 10 percent of the revenue from land sales were to be used to build affordable housing.

In addition, China decided late last year that spending on education will account for four percent of the gross domestic product in 2012. 

Source:capitalvue.com