Changes are in the works for borrowing by the country's local governments, including a modern rating system, reports Zheng Yangpeng

The national government will introduce a credit rating system for provinces, cities and counties as it seeks to

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establish a foundation for a well-regulated municipal debt market.

Sources said the Ministry of Finance conducted a nationwide study last year on the feasibility of a credit rating system. The Economic Observer has reported that the results of the study will yield a special regulation on credit ratings.

The ministry has consulted Dagong Global Credit Rating Co Ltd about the issue, the sources said. And at least one institution under the Chinese Academy of Social Sciences - the top government think tank - has been consulted, they said.

For the first time, China said in its urbanization plan, jointly issued by the Central Committee of the Communist Party of China and the State Council (the cabinet) on March 15, that it will allow local governments to issue municipal bonds.

But first a credit rating system has to be established so that the market can get information about issuers and determine prices.

Assuming these initiatives are implemented, the changes represent a momentous shift in China's government debt management, experts said.

Under the Budget Law, which is about two decades old, local governments can't issue bonds or run deficits. If they need to issue bonds, the debt will be issued through the Ministry of Finance.

To circumvent the ban, local governments often borrow heavily through several thousand local government financing vehicles.

But these entities, which are under local governments' direct supervision, are often badly managed and rife with cronyism, experts said. And with no rules on financial transparency, LGFVs' debts have ballooned in recent years.

According to a survey conducted by the National Audit Office, the debts of 13,000 LGFVs stood at a cumulative 6.97 trillion yuan ($1.13 trillion) as of June 30 last year, out of the 17.89 trillion yuan in total debts.

A significant weakening of China's economy this year has raised grave concerns about repayment of these debts.

The central government said it plans to ensure that local governments can obtain funds through well-regulated channels, a strategy described by Premier Li Keqiang as "opening the front doors while blocking the side doors".

A statement following the Third Plenum of the 18th Central Committee of the Communist Party of China also outlined a system of local government debt issuance based on credit rating.

Many local credit ratings agencies have offered their services to local governments in the past, but they only evaluated corporate bonds with the implicit backing of local governments.

Competition among credit rating agencies for business has become fierce, with executives at major agencies complaining that smaller companies are inflating ratings to get business.

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