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China Plans to Sell $29 Billion of Yuan Debt in 2010, Wen Says

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China Plans to Sell $29 Billion of Yuan Debt in 2010, Wen Says
March 04, 2010, 8:09 PM EST

March 5 (Bloomberg) -- China will sell 200 billion yuan ($29 billion) of bonds for a second year to help local governments fund infrastructure projects, Premier Wen Jiabao told today’s annual meeting of the National People’s Congress.

The finance ministry, which will organize the debt auctions, plans to offer three- and five-year securities and channel funds between bondholders and the local authorities issuing the notes, according to a person familiar with the proposal who asked not to be identified.

The central government’s role in local debt sales has reduced the cost of building roads and railways as part of a two-year $586 billion spending package that drove expansion of 8.7 percent in the world’s fastest-growing economy last year. Policy makers are seeking to maintain financing for such projects, while curbing record new bank lending that has increased the risk of property and stock-market bubbles.

“This alternative source of funding is healthy - Beijing may have realized the risk that local governments borrowed too much from banks last year,” said Mark Williams, an economist at Capital Economics in London who worked at the U.K. Treasury as an adviser on China from 2005 to 2007, in a telephone interview.

A spokesman for China’s Consulate General office in New York said he wasn’t aware of the government’s plans.


Three-year bonds sold last year on behalf of local governments, 30 provinces and five municipalities, yielded between 1.6 percent and 2.36 percent when they were auctioned, compared with the one-year lending rate in China of 5.31 percent. The sales are part of the government’s economic stimulus plan, announced in November 2008.

“It sounds like a perfectly sensible thing to do,” Charles Dumas, research director at Lombard Street Research Ltd. in London, said it an interview. “It undoes some of the monetary consequences of this huge spending surge by taking it out of the money supply. But of course it doesn’t in any way hold back the overheating of the total economy.”

China sold 1.42 trillion yuan of treasury debt last year to partly finance a record-high fiscal deficit in addition to the 200 billion yuan in securities it sold for provincial authorities. China’s deficit in 2010 will be similar to last year, when it was less than 3 percent of gross domestic product, Jia Kang, the head of the Finance Ministry’s research institute, said as law makers gathered in the capital this week.

Unbalanced Growth

The NPC convenes every March, with almost 3,000 lawmakers from China’s 32 provinces, autonomous regions and municipalities congregating at the Great Hall of the People in Beijing.

Wen has on at least two occasions said China’s growth was unsustainable and unbalanced; in a Dec. 27 interview with the official Xinhua News Agency and at the 2007 National People’s Congress.

China’s law prohibits local governments from incurring debt directly. Even so, the government plans a crackdown on investment companies set up by local governments to circumvent those regulations, the 21st Century Business Herald reported this week.

Borrowing by local-government entities, not counted in official estimates of China’s debt ratios, may push up the country’s borrowing to 96 percent of GDP, Professor Victor Shih, a political economist at Northwestern University in Evanston, Illinois, said on March 1. His forecast compares with an International Monetary Fund estimate for China of 22 percent this year, which excludes local-government liabilities.

The central bank has also ordered banks to set aside more funds as reserves and to rein in lending. In 2009, new loans rose to a record 9.59 trillion yuan.

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