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Chinese Cities Embark on Local Bonding Initiatives

October 24, 2011

China has long allowed local governments to set up municipal companies (read: public authorities) to raise money using land and government assets as collateral for bridge, road and other infrastructure improvements. To alleviate the shortage of cash in local governments, the central government in Beijing has, for the first time, authorized four fast growing localities in southern China to issue bonds through the municipal companies to supplement available cash for infrastructure.

There are concerns, however, about the amount of debt being incurred by local governments. As the New York Times reported in July:

In the last few years, cities’ efforts have helped government infrastructure and real estate spending surpass foreign trade as the biggest contributor to China’s growth….

But there are growing signs that China’s long-running economic boom could be undermined by these building binges, which are financed through heavy borrowing by local governments and clever accounting that masks the true size of the debt.

The danger, experts say, is that China’s municipal governments could already be sitting on huge mountains of hidden debt — a lurking liability that threatens to stunt the nation’s economic growth for years or even decades to come.

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