China’s Ningxia Hui Autonomous Region plans to sell as much as US$1.5 billion of debt in the first overseas bond issuance by one of the nation’s local governments since policymakers began allowing such fundraising.
Plans for the bond sale were announced in a statement AVIC Capital Co (中航工業投資) filed with Shanghai’s stock exchange yesterday, in which the company said its brokerage unit had been appointed the coordinator and financial adviser for the issuance. Ningxia may sell the debt as Sukuk or dollar bonds, with maturity of up to five years, according to the statement.
The proposed sale is the latest step in China’s push to increase the transparency of how provinces and cities fund local projects, and part of the nation’s goal of creating a modern fiscal system by 2020. China earlier this year passed legal amendments lifting a ban on direct bond sales by local governments, which are grappling with liabilities Fitch Ratings Ltd estimates at 30 percent of GDP.
China’s most recent state audit of local debt showed 17.9 trillion yuan (US$2.88 trillion) of regional liabilities in June last year, up 67 percent from the end of 2010.
A law initially passed in 1994 had banned local governments from selling bonds, prompting them to side-step the regulations by setting up thousands of companies used as financing vehicles to raise money for roads, sewage systems and sports stadiums. That law was revised in August, laying the legal framework for regional authorities to raise funds directly.
The Chinese Ministry of Finance first began allowing the cities of Shanghai and Shenzhen, as well as Zhejiang and Guangdong provinces, to sell municipal bonds in 2011 as part of a trial program. It added Shandong and Jiangsu provinces last year.
This year, the trial expanded to include Ningxia, Jiangxi Province and the cities of Beijing and Qingdao, as the ministry started to require disclosure of basic financial information and credit ratings. The development of China’s municipal bond market is vital in reducing risks from local government use of off-balance sheet debt, Standard & Poor’s said in a May report.
The International Finance News, a newspaper controlled by the Chinese Communist Party’s official People’s Daily, published a commentary in May encouraging local governments to sell debt outside of China. There is huge potential for Chinese local government bonds on global markets because they are more mature than domestic ones, it said.
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