The Development Research Center had put up a proposal for the government of China to allow its local counterparts to sell municipal bonds. The government think-tank's proposal was done to remedy a ballooning USD4 trillion debt incurred by China's local governments. The proposal was produced just before a policy-making meeting to reform Beijing's financial system set to be held next month.
Most of the debt were reportedly incurred by government financing vehicles. Local governments coincidentally were not allowed to sell bonds by national law to reduce borrowing. The local governments resorted to borrowing via financing vehicles as the latter reportedly do not disclose the size and health of its loans. According to the Development Research Center, selling bonds would require local governments to disclose information and spread deafult risk across a plethora of investors.
Local government vehicle financing eventually caused a global economic crisis in 2008. China, as a result, had to invest a CNY4 trillion stimulus package into its economy to reduce the impact of the economic crisis.
In a regional update this October, the World Bank said, "The rise in local government debt is ... a concern, given the complexity and opacity of municipal finances. This lack of transparency has led to debt levels higher than would otherwise be acceptable to lenders, investors and policy makers."
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