Amid concerns about slowed economic growth, China’s Ministry of Finance announced that Guangdong, Shanghai, Shenzhen, and Zhejiang’s local governments will be allowed to sell bonds on a trial basis. NPR reports:
China normally prohibits local governments from issuing bonds directly or from taking bank loans, confining such bonds to those issued by the central government on their behalf.
Local governments owe about 10.7 trillion yuan ($1.7 trillion) in debt through financing vehicles set up mainly to support construction projects, according to Beijing. Issuing bonds would help them to honor those obligations.
Aside from government debt, the China Banking Regulatory Commission (CBRC) is trying to address private debt and slow the credit growth. This has given rise to an increase in private lending. BBC adds:
Liu Mingkang, chairman of CBRC, said the commission was taking measures to ensure such activities do not put the financial system at risk…
These loans come with exorbitant interest rates, ranging from 14% to as much as 70%.
Mr Liu said the commission was “strictly against shadow banks and the risks associated with private financing”.
The rise in lending was followed by an increase in property prices, and this increase caused concerns about asset bubbles and bad debt . Premier Wen Jiabao commented that housing prices and job creation are critical points. The China Post reports:
“Currently, economic growth is slowing and external demand is falling, and we should make employment even more of a priority in economic and social development, doing our utmost to expand employment,” Wen told officials in Guangxi, a poorer region next to export-driven Guangdong province, the official People’s Daily reported.
Wen also said another plank of the government’s efforts to contain price rises — containing housing costs — was at a crucial stage.
As of August, China had built 8.68 million units of homes for rental or sale to poorer families this year, putting it on track to fulfill its full-year goal of 10 million homes.