China’s parliament has formally approved changes to the budget law allowing local governments to issue bonds directly, a reform that could help stabilize government financing by creating the country’s first municipal bond market.
Regulators have already experimented with allowing local governments to issue debt directly through a pilot program under way. The amendment to the budget law that the National People’s Congress passed on Sunday would certify the pilot and provide a legal basis for later expansion.
The National Audit Office estimates local governments owed 17.89 trillion yuan ($2.91 trillion) as of the end of June and says nine Chinese provinces failed to pay back some 800 million yuan of debt due in March.
As economic growth slowed, that situation apparently caused regulators to move faster on developing alternative funding channels for local governments, given estimates that a fifth of local government debt is set to come due in 2014.