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TIANJIN: Tianjin, China's fastest-growing major city, wants to be among the first to use municipal bonds to finance its infrastructure as the country's banks scale back on lending for such projects, the city's vice mayor said.
Chinese provinces and cities are vying for approval to issue bonds directly in the market to fund their ambitious investment plans as the central bank sustains policy tightening to bring inflation under control.
China currently bars local governments from taking on debt directly, but Beijing has said that it intends to allow cities and provinces to issue bonds directly to bring greater transparency to local finances and instill market discipline to their investments.
"We are actively exploring the possibility of issuing municipal bonds. We hope Tianjin could be included in a pilot programme," Vice Mayor Cui Jindu told reporters last Friday, Sept 16 during a group interview at the government's offices.
"We have to continue our infrastructure construction, but the road for getting bank loans has almost been blocked, so we will have to find new channels of funding," he said.
The ban on local government debt is partly to blame for the establishment of thousands of local government financing vehicles (LGFVs) during the 2008 global financial crisis, a backdoor through which localities were able to channel bank loans to projects including roads, bridges and stadiums.
An official newspaper reported earlier this month that three provinces — Zhejiang, Guangdong and Shandong — were getting ready to issue bonds directly instead of via the finance ministry, the first step toward the creation of a municipal bond market.
The Finance Ministry has been issuing debt on behalf of local governments over the past three years, at around 200 billion yuan (RM97.45 billion) per year, but that is a relatively small portion of their overall debt load.
The central government is trying to clean up the roughly 10.7 trillion yuan (RM trillion) in local debt — widely seen as the Achilles' heel of the world's second-largest economy.
Total bank loans obtained by Tianjin LGFVs this year will probably be about half of last year's 260 billion yuan, Cui said.
But Cui expressed confidence about the health of the city's remaining financing vehicles, which now number 41 compared with a peak of 155 during the global financial crisis.
"We won't have any problems with loan repayment within five years if there is no further credit tightening," he said, adding that Tianjin's strong economic growth — on track to reach 16.5% this year — would support the LGFVs.
The city's LGFVs, which have a total debt of 410 billion yuan, are due to repay about 40 billion yuan in bank loans and a further 60 billion yuan in 2012.
The city has reached an agreement with China Development Bank, a state bank that has lent heavily to local governments, to restructure some 50 billion yuan of the loans, he said.
Investors fear that a hard landing in China could trigger a wave of defaults by provincial and city governments and lead to a heap of bad loans.
Even without a hard landing, analysts say credit curbs could push many LGFVs to the wall as Beijing combats inflation. Banks have been told to cut lending to the property sector and LGFVs.
Tianjin Binhai New Area Construction & Investment Group, a giant LGFV tasked with building highways, roads and bridges in the city's Binhai district, has also felt the pinch of credit curbs, said Xu Hongzhi, the company's chief accountant.
"It has become more difficult to get financing for new projects and the cost of funding is also much higher than before," Xu told reporters.
Xu said that in the past, banks usually offered a 10% discount based on the benchmark lending rate, but starting from this April, the lending rate of bank loans for some of their projects are set even higher than the benchmark interest rate.
Glittering residential and office towers fill the sky in the Binhai new area, where many Fortune Global 500 companies have invested. The area was a piece of barren land until 1984. — Reuters
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