A rating system and complete transparency are the two key factors that will decide whether a pilot reform plan allowing local governments’ to sell bonds is successful, says the China Business News. Excerpts:

The central government always helps local governments pay off their debts in China, but the pilot reform that entitles local governments to sell bonds is particularly meaningful because it requires local governments to repay the bonds by themselves. This reform, if successful, will reshape relations between the central and local governments.

Despite the central government’s supervision over the plan, some risks must be heeded in the process. The central authority should figure out ways to prevent local governments from selling more bonds than is needed. It must also prevent governments from competing for bond buyers.

China’s infamous stock market is plagued by scams and speculation, an indication that the government bond market should not be initiated until a comparatively mature legal framework is established. Developed countries serve as good examples in this respect.

In this current context, a sound rating system and disclosures of information are two key factors. There must be independent rating agencies to evaluate a local government’s performance and balances.

Financial departments of local governments in the pilot program must disclose their information in a timely manner to the market.

There should also be an insurance system for the government bonds and a risk prevention and control mechanism to let the higher authority be aware of lower governments’ financial conditions.