China curbs third-party borrowing by local governments

The Chinese government has taken key steps towards increasing the responsibility of individual regional and local governments for their own borrowing and investment decisions, a Moody's report said.
The new guidelines, announced on October 2 by the State Council, represent an important move towards establishing a new direct borrowing model for local governments, it said.
The guidelines will restrict indirect borrowing such as through local government financing vehicles (LGFVs), thereby leading to a deceleration of local government debt, which has been climbing sharply over the past years.
Moody's notes that they will also address the problem of riskier forms of borrowing from different sources, as well as related loopholes. Part of this approach includes restricting the activities of lenders. The end result should be the adoption by the local governments of more direct ways of financing, in turn heightening transparency and ultimately leading to more responsible decision-making.
These guidelines constitute another milestone in the development of a local government bond market in China, the effective management of the sharp rise in local government related debt, and the restriction of increasingly riskier forms of borrowing, it said.
The guidelines follow the central government's amendment of the budget law in August which ended the prohibition on the regional and local government borrowing.
Principal features of the new guidelines announced on October 2 include: upper-tier local governments will begin to issue bonds directly in their own name; lower-tier local governments, such as cities and towns, will only borrow through upper-tier governments; general obligation bonds and special purpose bonds will be permitted in accordance with quotas set by the State Council; LGFVs will halt borrowing on behalf of local governments, a major move as the bonds and debt of these entities equaled 39 percent of total local government-related debt as of June 2013, according to Moody's.