Great demand
Ai Hongde, president of the Dongbei University of Finance and Economics based in Shenyang, capital of northeastern China's Liaoning Province, said there were latent risks in the 200-billion-yuan plan. Ai said the effect might be to loosen constraints on local governments, which might seek to take on more debt to deal with their fiscal difficulties.
Zhang's comments on local government financing methods could open the floodgates for local governments to issue their own debt through corporate bond issues or other disguised channels.
For some, that could be a big financial risk.
As the Ministry of Finance noted, fiscal revenues of local governments had been hit by the economic downturn and the tax breaks being offered to support growth.
For instance, the underdeveloped Anhui Province received 12.42 billion yuan in fiscal revenue in January, up 5.6 percent year-on-year -- the lowest growth rate in seven years. Other localities are little better off.
Jia Kang, head of the research institute of financial science under the Ministry of Finance, said that in January, Liaoning Province's fiscal revenue was up only 6 percent, compared with 57-percent growth a year earlier. Zhejiang's fiscal revenue fell 5.4 percent, Shanghai's slid 8.5 percent, Chongqing municipality's declined 25.2 percent and Xiamen city in the eastern province of Fujian saw fiscal revenue sink 15.2 percent.
But while local revenues are weakening, local spending to raise living standards and the environment is increasing, as more administrative power has been decentralized. Anhui's planned spending on livelihood projects increased 29 percent year-on-year to 22 billion yuan this year.
Gray area
Tongling City, Anhui, has decided to provide 400 low-rent apartments for low-income households, which is a stimulus-package demonstration project. Yao Xinsheng, head of the municipal finance department, told Xinhua Thursday that the municipal government wanted to buy the apartments at market price from local developers to support the real estate sector and the municipal economy.
Yao said the city would pay 1,800 yuan per sq m for the apartments, of which only 300 yuan would come from central government funds. The city would have to make up the difference some other way.
It's gaps like these that are driving China's local governments to look for loopholes that will allow them to borrow more from the public, both institutional and individual investors, in "hidden" ways. Economists call these methods "quasi" or "gray" local government bond issuance.
Many localities might try to use these methods, because the planned 200-billion bond program isn't nearly big enough to satisfy all their needs.