Moody's Investors Service says that China's Ministry of Finance's recent announcement that it is extending its new pilot program for a local government bond market to two more provinces - Jiangsu and Shandong -- represents an important step forward.
Moody's notes that, as a result of the July 4 announcement, six provinces and municipalities now have more autonomy to market their own bonds as well as issue them in their own name. The guidelines also provide advice on a more competitive process for bond issuance, including the specification that a credit rating system be established.
Moody's views were contained in a just-released special comment, titled "What's Ahead for Local Government Bond Market in China?"
In Moody's view, this latest announcement shows that momentum is building towards China's central government granting RLGs the ability to borrow directly - something which they currently cannot do - and which could ultimately lead to greater transparency and more refined fiscal policies for these entities.
More specifically, a local government bond market would help meet a number of central government goals with respect to improving the governance of regional and local governments. A direct form of borrowing would, for example, enhance the central government's ability to monitor and regulate RLG indebtedness.
It would also improve RLG accountability for their own investments and borrowing decisions; and discourage RLGs from engaging in irregular financing activities.
Moody's notes that the central government has been proceeding in measured steps as it seeks to balance its twin objectives of granting RLGs more autonomy with respect to their financing needs and of maintaining strong controls to ensure that debt levels are affordable.