China moves closer to establishing municipal bond market

Two firms to issue credit ratings of local governments.

China Credit Rating will partner with the Institute of Finance and Banking, a unit of the Chinese Academy of Social Science (CASS), to publish regular reports on the overall local government financing environment and develop quantitative indicators.

The ratings agency will use the institute’s work as a foundation to provide ratings of specific local government bond issuers.

China Credit Rating is one of China’s three main bond rating agencies. It is owned by the National Association of Financial Market Institutional Investors, an industry association for China’s interbank bond market.

Li Yang, CASS vice president and a former member of the central bank’s monetary policy committee, said that as China proceeds with financial and fiscal reforms, standardized local government bond issuance was likely to increase.

“In recent years, many types of debt are actually very close to local government debt, but they haven’t used the term ‘government debt’,” Li said.

In late July, the State Council, China’s cabinet, ordered an audit of all government debt including those obtained through local government financing platforms or LGFVs, highlighting concerns over an explosion in local borrowing.

Analysts said a mechanism to provide credit ratings of provincial and governments could lay the groundwork for reforms to allow direct bond issuance and bring greater transparency to the opaque dealings in Chinese local government finance.

China’s budget law prevents local governments from borrowing directly. Local governments, however, have evaded this restriction by taking on debt through LGFVs.