Local Government Allowed to Swap High Interest Debts with Municipal Bonds
The country’s local government are now allowed to swap its high interest debts for cheaper municipal bonds a move in which Finance Minister Lou Jiwei may help defuse some of the risk that surround the country’s US$ 3 trillion local debt. Lou said in speech on the fiscal system of China, stated that the country will control the amount of money that is being borrowed by its regional governments by ensuring all debts are being accounted for in their budgets.
These regional governments are responsible of the bulk of the public spending in China but will gather less of their share of the total fiscal income for the year compared to the Central Government which relied on borrowing heavily in the past years just to stay viable. To further ease on the financial pressure, governments are stuck with the expensive debt that can be replaced with a cheaper municipal bond that is subjected to approvals to get lower interest payments.
Last year a national audit of public finances showed that the country regional government has owed a total of US$3 trillion by the end of June 2013. For those with debts where the financing costs are high and local governments are allowed to apply to get their debt replaced by municipal bonds to help lower their interest burden.
If the law will be passed which experts says will happen by next week will help China score a reform victory that is vital for cleaning the public finances.