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Moody's Investors Service anticipates continued development of the regional and local government (RLG) bond market in China over the next several months and while the size of issuance in 2015 will be substantially more than 2014, predicting the amount is difficult. Moreover, Moody's believes that the emergence of the RLG bond market will be closely watched by capital market investors in 2015, as recent regulatory reforms aimed at encouraging RLG bond issuance start taking effect.
The expected development will be in line with the revised budget law enacted on 1 January 2015, which will allow some local administrations to issue bonds outside of the already existing pilot program. This decision dovetails with State Council guidelines encouraging local governments to begin issuing debt directly so as to reduce their reliance on risky indirect borrowing.
Moody's conclusions were contained in a just-released report, "China's Nascent RLG Bond Market: Answers to Frequently Asked Questions".
In discussing challenges to the market's development, Moody's says that, for now, the current lack of transparent data on RLG finances represents the biggest obstacle to the widespread acceptance of RLG bonds. In this context, Moody's notes that the Chinese government is putting in place the legal framework for RLG bond issuance, while simultaneously rolling out new accounting systems and enhancing disclosure rules aimed at ensuring that market participants have the information they need to make investment decisions.
Ultimately, this new framework for local government financing will lead RLGs to take direct responsibility for their own debt, encouraging them to borrow and invest more prudently.
RLGs had built up debt of RMB17.9 trillion as of June 2013, according to the most recent data. Much of this debt has been borrowed through third parties to circumvent restrictions on direct RLG borrowing.
Subscribers can access the full report at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1003288
