China will allow local governments to issue bonds directly for the first time in 17 years as Beijing acts to prevent potential defaults by provincial and city-level administrations that could wreak havoc in the country’s financial sector.
A pilot project announced on Thursday by China’s finance ministry will permit Zhejiang province, Guangdong province and the cities of Shanghai and Shenzhen to issue three and five-year bonds on their own. The project is expected to be extended to other local
governments around the country, many of which borrowed heavily to fund infrastructure projects as part of China’s enormous 2008 economic stimulus plan.
Local governments in China have not been allowed to sell their own bonds or run budget deficits since 1994, when Beijing introduced a ban because of concerns over the huge debts they were amassing. But most have managed to skirt these restrictions by setting up special purpose companies to arrange bank loans and other financing to pay for public works and investments.