The city's Pudong District may pioneer the issue of the long-anticipated local government bonds once the central government gives a green light for the release.

"We've actively been discussing with the pertinent parties about the release of local bonds before the State Council announced 30 measures to strengthen financial stability last December," according to a Shanghai Securities News report, citing an anonymous source from the Pudong Financial Service Office.

"We'll make public the proposal once we get a nod from the top policymakers," the source said.

"Local authorities are short of cash in their hands as the slumping sales in property market has eaten into their revenues amid the economic meltdown. Therefore, they have to seek alternative financing measures, and the municipal bond is a choice," said bond analyst Jiang Nan from a Shanghai-based securities.

The central government is mulling over the permission of the issue, and it is likely to put it into practice as early as this February, a source familiar with the matter was cited by China Business Journal as saying.

"But the Ministry of Finance, rather than the local entities, will exercise the obligation to issue the bonds," the source said.

Local government's increasing spending on medical system, pension insurance, and infrastructure construction has lead to a large gap between its spending and public revenue," said Li Junsheng, vice chancellor of Central University of Finance & Economics.

It appears that the local authorities have reached a tapping point to increase their fiscal revenues through the municipal bonds, Li said.

And Shanghai, in particular the booming new district of Pudong, is a preference.

"It's highly likely that cities in eastern China, like Shanghai, will become the first trial place to issue the bonds, given its adequate regulatory system and larger fiscal revenues," Jiang said.

However, experts remained skeptical on the feasibility of the controversial bonds because of supervision concerns.

"Many cities have a budget deficit, and the issuance of municipal bonds may result in financial crisis in local governments if under inappropriate supervision," Li said.

"The issue is highly likely to be discussed at the annual sessions of the national congress in March. And the first trial place may be approved afterwards," Jiang said.

(Shanghai Daily January 17, 2009)