Six provinces chosen for pilot bond scheme
March 17, 2009 | BY
clpstaff &clp articlesLocal governments will soon have a new way to raise money
Six provinces and municipalities, including Beijing, Shanghai, Tianjin and Chongqing, are expected to become pilot regions for bond issuance, following the review of an earlier State Council proposal by the Standing Committee of the National People's Congress.
The move comes in response to the central government's Rmb4 trillion stimulus package, which was announced in November 2008. The central government will come up with 29% of the package; the rest will be provided by banks, companies and local authorities. The latter will be asked to contribute Rmb600 billion in 2009, and it appears that some of this will be raised through the issuance of bonds.
The draft Tentative Regulations for Strengthening the Administration of Local Government Debts were submitted to the State Council late last year. At the time, Hubert Tse, managing director and head of Yuan Tai PRC Attorneys, told China Law & Practice that allowing such bond issuance would be a “breakthrough [as] the law would provide local governments with a useful and much needed channel for financing”.
It now appears the State Council has reviewed the Tentative Regulations and submitted them to the Standing Committee. The Regulations are expected to be approved at the annual meeting of the National People's Congress in March. The central government will then allow local governments to issue bonds of up to Rmb200 billion, according to a Caijing report.
According to Chen Guiyi, partner of Jingtian & Gongcheng, the bonds will be guaranteed by the Ministry of Finance, which will act as a bond issuing agent and distribute interest payments on behalf of local governments. Local government debtors will pay interest and issuing fees to the Ministry, while overdue payments will be deducted from annual subsidies to local governments or other funds channelled through Beijing.
“Local governments have long sought permission to raise money through bonds,” Chen said. “The economic crisis is giving [local governments] a new chance. We think it stands a good chance of being approved.”
However, giving a green light to local governments to issue bonds could have a downside.
Kong Wei, a partner of Grandall Legal Group, said that there is a risk that local governments may issue bonds excessively.
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