China MOF warns of slowing revenue, urges local govts to speed bond issuance

[SHANGHAI] China's Ministry of Finance has warned of slowing tax revenue growth and told local authorities to hasten issuance of newly-approved municipal bond debt - signalling official concern over provincial budgets at a critical time for the economy and planned fiscal reforms.

In a statement, the Ministry of Finance urged local finance bureaus to "speed up local government debt issuance and scheduling, rationally set debt issuance times, and urgently complete the work of issuing bonds." The direction to accelerate bond issuance comes as local government revenue from land sales is dropping sharply, and signs emerge that the ministry's plan to tap China's fledging local government bond market to make up for the loss of tax proceeds and off-balance sheet fundraising may be faltering.

Reports that banks are reluctant to purchase the new debt at the yields on offer have appeared in official media following the postponement, for unspecified reasons, of a Jiangsu provincial bond auction initially set for April 23.

On Friday, the Economic Information Daily, a Xinhua affiliated state-owned paper, reported that another province may also delay a planned debt auction because of a lack of investor interest.

China's local governments are struggling with an estimated 17.9 trillion yuan (S$3.82 trillion) of debt, much of it high yield and held off-balance sheet by "local government financing vehicles". Chinese municipalities were, until last year, largely prohibited from issuing official debt.

To help solve the problem, the Ministry of Finance announced in March that local governments could issue up to one trillion yuan of new, lower interest official provincial or municipal debt to help pay off existing obligations.

Despite the heavy indebtedness of many Chinese provinces, yields on the official Chinese provincial and municipal bond market remain extremely low, currently averaging 3.4 per cent, just 10 basis points above sovereign five year debt.

At such low yields, banks may be reluctant to buy the newly issued debt without additional concessions from the government.

Bank shares were boosted on Tuesday after unconfirmed reports that the central bank may have to "sweeten the pot"though extending low interest loans to banks backed by the new debt or directly purchasing commercial bank assets.

The Chinese central bank has instituted several policies to support the nation's banks in recent weeks, including planned tax rebates for policy lender China Development Bank and a 100 basis point cut to banks' required reserve ratio on April 19.

REUTERS