Chinese Local Government Debt Crisis and Evaluation of the Influences over Domestic Investment

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Abstract

 

This paper include five chapters surrounding the topic of Chinese “Local Government Debt Crisis”and Evaluation of the Influences over Domestic Investment: it starts with an introduction of the study as well as the problem to be researched and how the study will be organized; in the second chapter, basic concepts as well as main theories and past relevant studies had been reviewed to provide a theoretical base for the study in respect of the study of the government debt crisis; after the statement of the research strategy, data collection and methods of data analysis in the third chapter, the major body of this study will the analysis based on an original survey done on 100 domestic investors; the last chapters will be the drawing of conclusions and summary of some recommendations offered to help with the current “local government debt crisis” in China.

 

 

Content page

Abstract………………………………………………………………………………………………………….. 1

Content page…………………………………………………………………………………………………… 2

List of Tables…………………………………………………………………………………………………… 5

List of Figures…………………………………………………………………………………………………. 5

List of Charts………………………………………………………………………………………………….. 5

Chinese “Local Government Debt Crisis”…………………………………………………………… 7

and Evaluation of the Influences over Domestic Investment…………………………………. 7

  1. CHAPTER ONE: INTRODUCTION………………………………………………………. 7

1.1           Background of Study……………………………………………………………………. 7

1.2           Overview the research……………………………………………………………………. 8

1.3           Objectives of the research………………………………………………………………. 8

1.4           Research problem………………………………………………………………………….. 8

1.5           Significant of study………………………………………………………………………. 9

1.6           Organization of the research…………………………………………………………… 9

1.7           Research Assumptions…………………………………………………………………. 10

  1. CHAPTER TWO: LITERATURE REVIEWS………………………………………. 11

2.1           Introduction……………………………………………………………………………….. 11

2.2           Basic concepts, terms & definitions……………………………………………….. 11

2.2.1     Debt Finance & Equity Finance………………………………………………. 12

2.2.2     Advantages and Disadvantages of Debt Finance………………………. 12

2.2.3     Government debt………………………………………………………………….. 13

2.2.4     Local Government Debt………………………………………………………… 13

2.2.4.1Source of Local Government Debts………………………………….. 14

2.2.4.2Usage of Funding Collected via Local Government Debts….. 17

2.2.4.3Levels of Local Government Debts………………………………….. 17

2.2.5     Government Debt Default / Sovereign Defaults……………………….. 18

2.3           Signs of Local Government Debt Crisis: Chronological Events…………. 19

2.4           Government Debt Crisis Literature………………………………………………… 22

2.4.1     Reasoning the Government Debt Crisis……………………………………. 22

2.4.1.1The government debt limit………………………………………………. 22

2.4.1.2The legal “black holes”……………………………………………………. 23

2.4.1.3The proactive fiscal policy……………………………………………….. 23

2.4.1.4Moderately easy monetary policy……………………………………… 24

2.4.1.5The political system: GDP as a top priority………………………… 24

2.4.2     Impacts of Government Debt Crisis………………………………………… 25

2.4.2.1Impacts over the market confidence…………………………………. 25

2.4.2.2Crowding out private capital……………………………………………. 25

2.4.2.3Leading to macroeconomic instability……………………………….. 26

2.4.3     Response and Possible Solutions in Relate to Government Debt…. 26

2.4.3.1The “stability bonds”………………………………………………………. 26

2.4.3.2Establish principles aimed at promoting responsible lending and borrowing      27

2.5           Conclusion…………………………………………………………………………………. 27

  1. CHAPTER THREE: METHODOLOGY……………………………………………….. 27

3.1           Introduction……………………………………………………………………………….. 27

3.2           Research Objectives…………………………………………………………………….. 28

3.3           Research Strategy……………………………………………………………………….. 28

3.4           Data Collection…………………………………………………………………………… 28

3.5           Sampling……………………………………………………………………………………. 29

3.6           Data Analysis……………………………………………………………………………… 29

3.7           Limitations…………………………………………………………………………………. 29

  1. CHAPTER FOUR: ANALYSIS…………………………………………………………….. 30

4.1           Part I: Respondent Details……………………………………………………………. 30

4.2           Part II: Reasoning the Local Government Debt Crisis……………………… 34

4.3           Part III: Impacts of Local Government Debt Crisis…………………………. 36

4.4           Part IV: Solutions and Suggestions to the Resolution of the Local Government Debt     39

  1. CHAPTER FIVE: CONCLUSION & RECOMMENDATIONS…………….. 41

5.1           Conclusions………………………………………………………………………………… 41

5.2           Recommendations……………………………………………………………………….. 42

5.2.1     Bond issued by local government can provide a lower cost way of financing    42

5.2.2     Establish high-quality government debt management system……… 43

5.2.3     Establish a regular publishing and alert system regarding the updated summary of the local government debt……………………………………………………………………………… 43

List of Reference…………………………………………………………………………………………… 44

Appendix: Online Survey Titled “Reasons, Impacts of and Solutions for Possible Local Government Debt Crisis in China & the Influences over the Domestic Investment Confidence”……………………. 50

 

 

 

List of Tables

Table 1 Source of Local Government Debt in China……………………………………. 18

Table 2 Major categories of government debt……………………………………………… 20

 

List of Figures

 

Figure 1 Conceptual Framework (developed for this study)…………………………. 13

 

List of Charts

 

Chart 1 The annual growth rate of monetary supply (M1 & M2) and the total loans       27

Chart 2 The gender ratios of the respondents……………………………………………… 33

Chart 3 The age groups of the respondents………………………………………………… 34

Chart 4 The occupations of the respondents……………………………………………….. 35

Chart 4 The income level of the respondents………………………………………………. 36

Chart 6 The most likely scale of the Local Government Debt……………………….. 37

Chart 7 The main reasons behind the local government debts crisis in China….. 38

Chart 8 Investment confidence reduced by concern over the possible Local Government Debt Crisis in China……………………………………………………………………………………………………… 39

Chart 9 Possibility of Local Government Debt Crisis in China’s impacting the economic recovery and further growth……………………………………………………………………………………………. 40

Chart 10 The worst impact of the burst of local government debt crisis…………. 41

Chart 11 Private capital formation being crowded out by government borrowing42

Chart 12 Local government’s issuing bond will be a good solution to the current “Local Government Debt Crisis in China”……………………………………………………………………………….. 42

Chart 13 Local government’s issuing bond will be a good solution to the current “Local Government Debt Crisis in China”……………………………………………………………………………….. 43

Chart 14 Purchasing of local government bond (if any) as a safe investment channel     44

Chart 15 High-quality government debt management can help reduce the government’s debt-serving costs     44

Chinese “Local Government Debt Crisis”

and Evaluation of the Influences over Domestic Investment

 

1.        CHAPTER ONE: INTRODUCTION

 

1.1    Background of Study

 

Since the outbreak of debt crisis in Europe, government debt is often seen in the media in newspapers around the world and local government debt issue in China became a hot topic. British “Financial Times” reported on January 30 this year that the Chinese banks already have at least three-quarters of their saving to be distributed to the local governments, and the loans were due at the end of 2012 at the latest, which highlights the enormous challenges China faces in the huge debt digestion (ft.com 2013). The “Financial Times” also pointed out that during the global financial crisis, China’s local governments across the country had raised massive debt to provide funding for the stimulus package and now the local governments are difficult to generate adequate revenues cover the debt service (sina.com.cn 2013). Korea Mirae Asset Securities analyst Stanley Li commented that “The payback period (initiated by the local government) of the infrastructure projects, will take 10 years” (ft.com 2013). Fitch Ratings Ltd cut China’s long-term local-currency debt rating, citing rising risks to the country’s financial stability given the lack of transparency in the increased borrowing of local governments. Fitch lowered its assessment by one step to “A+,” the fifth-highest grade, the London-based company said in an e-mailed statement on Tuesday. It estimates total credit in China’s economy, including various forms of so-called shadow banking, may have reached 198 percent of GDP at the end of last year, up from 125 percent four years earlier (taipeitimes.com 2013).

 

 

 

1.2    Overview the research

 

The term debt could be referred as an amount owed to a person or organization for funds borrowed. Debt can be represented by a loan note, bond, mortgage or other form stating repayment terms and, if applicable, interest requirements. These different forms all imply intent to pay back an amount owed by a specific date, which is set forth in the repayment terms (Fay 2012). A debt crisis occurs when a national government cannot pay the debt it owes and seeks, as a result, some form of assistance (Keithly 2012). This study will be concentrating on the recent widely concerned so called “Local Government Debt Crisis” in China and the policy responses to this issue with the further focus on the Furniture Manufacturing Industry as a demonstration of the practical impacts caused by the issue. This research will surround the topic of the local government debt issue in China and influence over the domestic investment confidence.

 

1.3    Objectives of the research

 

Analyze the happening of the Local Government Debt issues in term of reasons;

 

To access the impacts of the Local Government Debt Crisis in China;

 

To develop the possible solutions to the local government debt crisis;

 

1.4    Research problem

 

With a given definition above regarding debt crisis, i.e. a debt crisis occurs when a national government cannot pay the debt it owes and seeks, as a result, some form of assistance (Keithly 2012), here we define the Local Government Debt Crisis as the happening or predictable inability of the local governments in generating cash flows to meet the maturities of relevant government debts. The research problem will be how influential the Local Government Debt Crisis will be in mainland of China from the perspective of the domestic investment and how it could be handled.

 

1.5    Significant of study

 

As a widely concerned issue with possibly huge impacts over the social and economic development in China, the secondly largest economy behind the US since 2010[1] (wsj.com 2011), it would be of great significance to study this issue for both the Chinese people as well as to the rest of the world. This research is viable for two major reasons: First of all, a lot of Government Official Data is available; Secondly, online survey is workable with no cost as well as with convenience to get access to wide public opinions in respect of the local government debt issues.

 

1.6    Organization of the research

 

The research will start from the reasoning of the Chinese government’s initial actions to raise the debts in 2008 which led to the later local government debts issues and followed by the evaluation of the possibility of the crisis based on the present data; and then the research will study the impacts of the increasing local debts over the domestic investment.

 

 

 

 

 

 

1.7    Research Assumptions

 

A1: No Major External Economic / Political Changes

 

In order to analyze and further predict the development of the current Local Government Debt Crisis in China, the first key assumption to be made is that we assume there are no major global financial and political changes / events that will significantly reshape the current external economic conditions faced by China’s economic due to the unpredictability of too many variants and contingencies.

 

A2: Investment confidence loss can be calculated by surveying the respondents

 

As mentioned, we will access the impacts of the local government debts over the domestic investment; here we assume that the responses from the respondents who are domestic investors could reflect truly the thinking of the respondents over the issue. We assume that their answers are true and can be used for calculation and analysis in this study, deliberate wrong answers would not be calculated as a possibility.

 

A3: Accuracy of Government Official Data

 

With the wide using of data released by the Chinese central government as well as the local level governments, we assume there is high degree of accuracy of these data unless and until there are obvious contradictions widely accepted. This is to ensure the base of our analysis and discussions.

 

 

 

 

 

2.        CHAPTER TWO: LITERATURE REVIEWS

 

2.1    Introduction

Figure 1 Conceptual Framework (developed for this study)

Figure 1 Conceptual Framework (developed for this study)

 

2.2    Basic concepts, terms & definitions

 

2.2.1            Debt Finance & Equity Finance

 

A debt is an obligation owed by one party (the debtor) to a second party (the creditor). Debt usually refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value. In finance, debt is a mean of using anticipated future purchasing power in the present before it has actually been earned. Some companies and corporations use debt as a part of their overall corporate finance strategy. The various types of debt can generally be categorized into: 1) secured and unsecured debt, 2) private and public debt, 3) syndicated and bilateral debt, and 4) other types of debt that display one or more of the characteristics noted above (Boundless.com 2013).

 

In finance, in general equity can be understood as ownership in any asset after all debts associated with that asset are paid off. Equity financing is acquired from personal money of the business owner or from other investors, such as shareholders of the corporation. Investors that provide equity funding to the business will receive a share in the ownership of the business and in the business profits in return for their contribution. Equity funds are usually unsecured. This means that the investor does not have a claim on any of the assets of the business (albertacanada.com 2013

 

2.2.2            Advantages and Disadvantages of Debt Finance

 

According to Karl F Seidman (2005, p. 32), the advantages of debt financing largely mirror the disadvantages of equity. First, there is no dilution of ownership with debt financing. Speaking from the business sector, a business needs only repay the amount borrowed plus the specified interests; any growth in the business’s value over the loan period fully accrues to the owners. Second, debt is less costly than equity since lenders bear less risk through receiving regular principal and interest payments and collateral, which provides a second avenue for repayment beyond the firm’s cash flow. Thirdly, there is greater availability of debt financing than equity. There are four disadvantages exist with debt financing. First, unlike equity, debt must be prepaid even when a firm’s revenue declines or costs rise unexpectedly. These fixed payments reduce monies available to reinvest in the business to improve earning and can generate financial hardship when earnings decline. A second closely related disadvantage is that debt usually requires a firm to pledge its assets as collateral. This limits the business’s ability to borrow in the future.

 

2.2.3            Government debt

 

Public debt, which is also sometimes referred to as government debt, is all of the money owed at any given time by any branch of the government. It encompasses debt owed by the federal government, the state government, and even the municipal and local government. It is, in effect, an extension of personal debt, since individuals make up the revenue stream of the government. Public debt accrues over time when the government spends more money than it collects in taxation. Some people use the term public debt to refer not only to money directly owed in the form of securities that can be collected on by a government, but also on the pool of money owed in the form of services and payments promised. (wisegeek.org 2013).

 

2.2.4            Local Government Debt

 

Depending on different national situations, the risk of local government debts could be various. Lending to a local or municipal government can be just as risky as a loan to a private company, unless the local or municipal government has sufficient power to tax. In this case, the local government could to a certain extent pay its debts by increasing the taxes, or reduce spending, just as a national one could. Further, local government loans are sometimes guaranteed by the national government, and this reduces the risk. In some jurisdictions, interest earned on local or municipal bonds is tax-exempt income, which can be an important consideration for the wealthy (Longenecker 2007). The debt limit, or “ceiling,” sets the maximum amount of outstanding federal debt the U.S. government can incur by law. As of May 2013, this number stands at $16.699 trillion. Increasing the debt limit does not enlarge the nation’s financial commitments, but allows the government to fund obligations already legislated by Congress (cfr.org 2013).

 

2.2.4.1      Source of Local Government Debts

 

Based on different national financial systems, capital markets and credit markets and the degree of development, the sources of local government debts in different economies and countries are closely related with the development of the financial system in the specific country. But majorly there are three types of sources of local government debts (Shah 2007):-

 

Bank Borrowings

 

In most countries where bank loans play a major role in the finance market, governments may set up specialized banks to provide funding to local government. And in other countries, local government funding may be supplied by several key and mainstream private banks. In case of the latter, the local governments being a borrower may squeeze out the private borrowers since governments tend to have better credit than private businessmen. Also if there is a lack of mature information disclosure system, the supervision over the local government borrowing from banks can be ineffective leading to possible supervision problems.

 

Bonds

 

In the more developed capital markets such as the U.S., municipal bond is the main form of local government debt. Municipal bonds are generally used by governmental issuers for long-term financing of capital projects. Maturity dates are typically between one and 30 years from issuance. Typically, local government bonds interest rate will be lower than bank lending rates. Interest may be paid either at a stated fixed rate, or at a variable interest rate that is determined from time to time based on a stated process or formula. Typical forms of municipal bonds include General Obligation Bonds[2], Revenue Bonds[3], Double-Barreled Bonds[4] and Moral Obligation Bonds[5]. Take the US as an example, to finance the debt, the U.S. Treasury sells bonds and other types of securities. Anyone can buy a bond or other Treasury security directly from the Treasury through its website, treasurydirect.gov, or from banks or brokers. When a person buys a Treasury bond, she effectively loans money to the federal government in exchange for repayment with interest at a later date. There are actually many different kinds of Treasury bonds, but the common thread between them is that they represent a loan to the Treasury, and therefore to the U.S. government. As citizens of a democracy, Americans collectively own the federal government, thus a big portion of the federal debt—the portion that was leant to the government by Americans people (nationalpriorities.org 2013).

 

Public Funds

 

In some countries, local governments can borrow financial loans from higher level government or central government. Even in some countries the central governments are forbidden to lend money to the local government, the central governments also tend to have establishment of government funds to provide incentives or training in helping local governments to approach the loan application laying the foundation for local governments to get commercial loans.

 

Source of Local Government Debt in China

 

Local Government Debt Direct Debts Possible Debts
Visible Debts 1.Treasury lending

2.External debt assigned by central bank

3.Special loans

4.Project payment arrears, unpaid wages

5.Comprehensive agricultural development loans

6.Domestic loans from financial institutions

7.Loans from private business

8. Loans from individuals

1.Government guaranteed debt (including foreign government loans, Loans from international financial organizations)

 

2.Government guaranteed domestic debt (domestic financial institution loans, business loans, personal loans

Leasing company specific loan and etc)

3.Arrears of pensions for retirees from enterprises

Invisible Debts 1.Education liabilities

2.Infrastructure liabilities

3.Grain subsidies

4.Social security expenditure

1.Local financial institutions bankruptcy

(e.g. Bank of bankruptcy)

2.Reform of state enterprises costs

.3.Security breaches in the public sector (not guaranteed by central government)

4.Policy-oriented financial institutions debt

5.Bad debts borrowed from the government

6.Lower levels of government fiscal crisis

Table 1 Source of Local Government Debt in China

Source: mbalib.com 2013

 

2.2.4.2      Usage of Funding Collected via Local Government Debts

 

Government expenditure generally involves longer term public investment and infrastructure construction. In the US, The Bureau of the Fiscal Service is responsible for accounting for and reporting the debt in accordance with statutory direction. The Bureau does not have any public policy decision-making authority. Local government debt financing is mainly used in three areas: (a) funding for the public capital programs, such as schools, roads, drainage and etc; (b) support and subsidies for private events, such as private home mortgages, student loans or industrial development; (c) revolving short-term expenses or special plans. In addition, if interest rates fall, the local government may also refinance to cover the old debt (treasurydirect.gov 2013).

 

2.2.4.3      Levels of Local Government Debts

 

Different local governments tend to have different structure and levels depending on the administrative division of the government, below are the levels of local government debts in China based on the level of the local governments under the supervision of the central government:-

administrative Division Major categories of government debt
Province Government assigned foreign debt, national debt, domestic loans from financial institutions, international financial organizations, special loans, loans to units, wage arrears administrative institutions and retired personnel costs, grain subsidies for food price drop, policy unpaid debts debt), local government guaranteed loans, the social security fund gap, lower levels of government fiscal crisis, the state-owned enterprise reform costs

 

City Borrowing by domestic financial institutions, national debt, special loans, debt, finance working capital, government guaranteed domestic debt, government security breaches, the cost of state-owned enterprise reform, social security fund gap loans to units and individuals, lower level government fiscal crisis
County Infrastructure construction loans, unpaid wages, education debt, grain subsidies for food price drop, borrowing to units and individuals, government guaranteed domestic debt, lower level government fiscal crisis
Township Public welfare liabilities, unpaid wages for projects, special loans for rural cooperative foundations and so on.

Table 2 Major categories of government debt

Source: mbalib.com 2013

 

2.2.5            Government Debt Default / Sovereign Defaults

 

Government debt default / Sovereign defaults refer to the failures on the repayment of a county’s government debts. Countries are often hesitant to default on their debts, since it will be difficult and expensive to borrow funds after a default event. However, sovereign countries are not subject to normal bankruptcy laws and have the potential to escape responsibility for debts without legal consequences. Sovereign defaults are relatively rare, and are often precipitated by an economic crisis affecting the defaulting nation. Investors in sovereign debt closely study the financial status and political temperament of sovereign borrowers in order to determine the risk of sovereign default (investopedia.com 2012).

 

2.3    Signs of Local Government Debt Crisis: Chronological Events

 

2008: The 4 trillion yuan stimulus package

 

Following the US led global financial crisis, in November of 2008, a stimulus package estimated at 4 trillion yuan (about 570 billion U.S. dollars) was planned to be spent over the following two years to finance programs in 10 major areas, such as low-income housing, rural infrastructure, water, electricity, transportation, the environment, technological innovation and rebuilding from several disasters. Concerns over the government debt in the world’s second-largest economy have intensified since China introduced the 4 trillion yuan stimulus package in 2008 and later tightened the reins on the white-hot real estate market, which affects local governments’ land sales, a major contributor to their fiscal revenue (cnstock.com 2012).

 

2008: Various government backed investment platforms

 

While local governments can’t borrow funds themselves, they typically get around those restrictions by having government backed investment platforms – called local government financing vehicles – or quasi-government agencies borrow instead. The local government is still indirectly responsible for the debts, however. Soon after the financial crisis, local governments in China had set up a total of about 11,000 of government backed investment platforms. As an independent legal person, the government backed investment platforms bypassed the restrictions and provided funds to local infrastructure projects and industrial investment. Initially these companies relied on bank loans, and later many of them began issuing bonds, trust products and even build – transfer (BT), finance leases, urban development funds and other means in order to get financing. This makes the local government debt more complex and it is difficult to obtain the accurate statistics and issue effective control over the expansion of the local government debts (wsj.com 2013).

 

27th Jun 2011: Local government debts amounted to 10.7 trillion Yuan

 

27th Jun 2011, according to a report by the National Audit office, the total local government debts amounted to 10.7 trillion Yuan. Within this 10.7 trillion, 6.7 trillion Yuan of that (62.62% of total) was debt owed by the government, 2.3 trillion Yuan (21.9% of total) was debts guaranteed by the government. The rest is contingent liabilities, which amounted to 1.7 trillion Yuan (15.58% of total) (audit.gov.cn 2011).

 

30th Jun 2011: Chinese government-backed road builder struggles on debt

 

A Chinese highway builder backed by local government is struggling to repay nearly 100 billion yuan ($15.5 billion) worth of bank loans, local media said, highlighting credit stresses that threaten to weaken China’s economy. Investors have long worried China could suffer widespread loan defaults among its heavily-indebted local governments as higher interest rates and loan repayments kick in, and so hurt its banks and economy. Although Beijing acknowledges the problem and estimates local governments have chalked up about 10.7 trillion yuan of debt , it is unclear if authorities have thoroughly reviewed a complicated web of covert borrowing and lending (reuters.com 2011).

 

5th Jul 2011: Chinese local debt understated by $540 billion, said Moody’s

 

Addressing the estimate by China’s state auditor that its local governments have chalked up 10.7 trillion yuan of debt, Moody’s said it found more potential loans after accounting for discrepencies in figures given by various Chinese authorities. In view of that, the non-performing loan ratio for Chinese banks could be as high as 8-12 percent, compared with 5-8 percent in the base case and 10-18 percent in the stress case. Unless China comes up with a “clear master plan” to clean up its pile of local government debt, the credit outlook for Chinese banks could turn negative, the ratings agency said. Moody’s said it expects Beijing to “implement gradual discipline” over the stock of government debt, and that would involve the Chinese government leaving banks to manage a part of the problem loans on their own (reuters.com 2011).

 

3rd Sep 2013: Land sales account for nearly 50% of the local fiscal revenue

 

According to the updates of an official from the Ministry of Finance, from January to July 2013, the government land sale revenue reached 2.0151 trillion yuan, an increase of 49.4% while over the same period the fiscal revenue was 4.208 trillion yuan, an increase of 13.5%. With land sales hitting the new highs, the land sale accounted for nearly 50% of the local fiscal revenue, and the growth rate is far higher than the GDP growth rate over the same period (xinhuanet.com 2013). It is believed that the increasing fiscal spending and local financial risks has made it so difficult for many local governments to get rid of real estate dependence in financing.

 

16th Oct 2013: (Standard Chartered estimated China’s local government debt may account for 40% of GDP)

 

According to the recently released research report by the research team of the Standard Chartered Bank, the estimated size of local government debt in China could reach 21.9 to 24.4 trillion yuan accounting for 38-42% of the national GDP, nearly twice the value of the current official estimates. Standard Chartered Bank Stephen Green, head of Greater China Research on Securities Market Weekly pointed out that, as the end of the first half of 2013, the bank estimates the Chinese local government debt is estimated at 21.9 trillion yuan, if coupled with corporatization local government financing platform loans, the maximum or total debt amounted to 24.4 trillion yuan, of which bank loans is approximately 9.7 trillion yuan, accounting for approximately 44% of the total debt, the data from the China Banking Regulatory Commission on local government financing platform loans directly to banks estimate the scale of subordination is trust loans, bonds and notes financing reached 3.2 trillion yuan. Besides, about 2.2 trillion yuan entrusted loans accounted for about one percent also worth noting that local government financing platform is also trust and entrusted loans mainly invested, accounting for both about one third of the total size (readdailynews.com 2013).

 

Oct 20, 2013: China looks to municipal bonds to clean up local-government debt

 

China may decide next month to expand a trial program allowing local governments to sell bonds, in response to concerns that their huge borrowings are largely hidden from view and pose a risk to the stability of the nation’s financial system. A government think-tank that advises China’s cabinet, the Development Research Center, has put forward a proposal calling for greater use of municipal bonds ahead of a policy-making meeting next month to decide Beijing’s long-term reform agenda (reuters.com 2013).

 

2.4    Government Debt Crisis Literature

 

2.4.1            Reasoning the Government Debt Crisis

 

2.4.1.1      The government debt limit

 

U.S. Senate leaders announced a deal on 16th Oct 2013 to end a political crisis that partially shut down the federal government and brought the world’s biggest economy close to a debt default that could have threatened global financial calamity. Before this, it was widely discussed that if Treasury is unable to issue new debt or take further actions to bridge the deficit, the government would be forced to default on some of its financial commitments, limiting or delaying payments to creditors, beneficiaries, vendors, and other entities (reuters.com 2013). And it would definitely lead to an artificial debt crisis.

 

2.4.1.2      The legal “black holes”

 

Because most Chinese local governments are not allowed to issue bonds directly according to the budget law, they have borrowed heavily through the so-called “local governments financing vehicles”. At first glance, these LGFVs, titled “investment and development corporation of X city” or “asset operation and management corporations of X city”, look like independent companies and the bonds they issue are counted as corporate debts. But their operation is under the direct disposal of local governments and their debts are implicitly guaranteed by local governments. Because no law required disclosure of these companies’ liabilities, the size of the debt is largely vague. They have been described by the Chinese media as “black holes” (chinadaily.com.cn 2013).

 

2.4.1.3      The proactive fiscal policy

 

Much of the local debt in China came from a surge in lending in the wake of the global financial crisis in 2008, when policymakers adopted a 4-trillion-yuan ($640 billion) stimulus package to buoy the economy. Local governments took advantage of the borrowing and spending binge between 2009 and 2010 and owe a great deal of debt that has beset the government and the market. Local liabilities began surging in 1998 and 2009, when outstanding debt surged 48.2 percent and 61.9 percent, respectively. The government announced the 4 trillion yuan stimulus, but 12 trillion yuan was actually raised from 2008 ~ 2010, mostly through local governments according to Xu Chenggang, an economics professor at Hong Kong University (scmp.com 2013). Therefore, the proactive fiscal policy which pushed up the government spending was the most fundamental reasons behind the rapid increase of the local government debts as the local government needed to follow the policy raised by the central governments.

 

2.4.1.4      Moderately easy monetary policy

Chart 1 The annual growth rate of monetary supply (M1 & M2) and the total loans

Chart 1 The annual growth rate of monetary supply (M1 & M2) and the total loans

Source: The People’s Bank of China 2010

 

As for monetary policy, it was abnormally loose in 2009. In late 2008, the central bank cut interest rates five times within 100 days (mof.go.jp 2011). The one-year deposit and lending rates had maintained 2.25% and 5.4% since then, which were a historic low level. Almost at the same time, the central bank decreased deposit-reserve ratio three times to the level of 15.5%. The ratio had remained this level until the central bank increased it twice in early 2010. As shown, the loans growth rate in 2009 was the highest since 1990, the M1 growth rate in 2009 was the highest since 1994, and the M2 growth rate in 2009 was the highest since 1999. Therefore, it seemed that the easy monetary policy enabled the continual rapid expansion of the local government debts in China.

 

2.4.1.5      The political system: GDP as a top priority

 

It is well known that China is still adopting a planned economy system, the central government has repeated over and over again that “China must maintain a proper level of economic growth in order to provide necessary conditions for creating jobs and improving people’s wellbeing and to create a stable environment for changing the growth model and restructure the economy.” Thus the government must ensure that economic growth is in accord with the potential economic growth rate. In the local governments, the circle of “Borrowing – Development – Profit Generation – Repay the Debts” has been widely adopted (xinhuanet.com 2013). By borrowing more money, a local government can increase the investment in urban infrastructure, which can significantly improve the investment environment, increase the attractiveness to foreign capital, and promote local economic development, at the same time it also allows the city to obtain significant land appreciation, which increases local revenue, and the increase income can be used to repay debt.

 

2.4.2            Impacts of Government Debt Crisis

 

2.4.2.1      Impacts over the market confidence

 

According to the experience of the Sovereign Debt Crisis in Greece, market confidence will mirror the development of the debt crisis. For instance, continued financial crisis hitting several major European countries had pushed several European countries into recession had been hitting investment confidence in EU in 2011, and investor confidence had increased in 2012 in response to temporary easing of concerns over the Sovereign Debt Crisis (ibtimes.com 2013).

 

2.4.2.2      Crowding out private capital

 

According to Jerry W. Hedge and Walter C. Borman (2012), if the government maintains a constant level of spending but switches from a fully tax-funded budget (that is funded by taxing the working young people) to borrowing funds, then the current young generation will increase their consumption, thus reducing the resources available for capital formation. Consumption increases because borrowing must, in a two-age model, be funded by future taxation, which will not be paid by the current generation of taxpayers. As such, a shift from taxation to government deficits leaves the current generation of tax payers better off because they will pay lower total taxes. However, because it reduces savings and thus crowds out private investments, government debts reduce the welfare of the future generations by reducing the capital stock that will be available in the future.

 

2.4.2.3      Leading to macroeconomic instability

 

According to Graeme Wheeler (2004, p. 8), historically, risky government debt structure which is characterized by excessive amounts of short-term or floating-rate debt, or of debt dominated in or indexed to foreign currencies- and the macroeconomic policies that necessitate these portfolio choices have been major factors in economic and financial crises.

 

2.4.3            Response and Possible Solutions in Relate to Government Debt

 

2.4.3.1      The “stability bonds”

 

A growing number of investors and economists say Eurobonds would be the best way of solving a debt crisis, though their introduction matched by tight financial and budgetary coordination may well require changes in EU treaties. On 20 October 2011, the Austrian Institute of Economic Research published an article that suggests transforming the EFSF into a European Monetary Fund (EMF), which could provide governments with fixed interest rate Eurobonds at a rate slightly below medium-term economic growth (in nominal terms). On 21 November 2011, the European Commission suggested that eurobonds issued jointly by the 17 euro nations would be an effective way to tackle the financial crisis. Using the term “stability bonds” (Stephan 2011).

 

2.4.3.2      Establish principles aimed at promoting responsible lending and borrowing

 

The establishing of a set of principles aimed at promoting responsible lending and borrowing is considered as a possible way to help improve the issue the local government debt crisis. Such principles should emphasizes the co-responsibility between creditors and borrowers and include principles such as due authorization, due diligence and protection of the public interest, transparency, disclosure and agreed procedures for debt restructuring if that becomes necessary (unctad.org 2012).

 

2.5    Conclusion

 

With the discussion above, local government debts is similar but in many cases different with the business debt as a government role is involved. China’s local government debt crisis is resulted by various reasons some of which are even inherent such as the legal black holes. It would be very significant for us to study the reasons, impacts as well as the possible solutions to the issue.

 

3.        CHAPTER THREE: METHODOLOGY

 

3.1    Introduction

 

In this section, we will focus on the statement of the research objectives and strategy as well as the data collection way in order to further explain the formation of the research.

 

3.2    Research Objectives

 

This study will target on the domestic investors and evaluate their perception of the local government debts in term of:-

 

l  The reasons behind the crisis;

l  The impacts of the crisis;

l  Possible solutions and suggestions to the crisis

 

3.3    Research Strategy

 

In this research, both quantitative and qualitative analysis will be applied to help with a more comprehensive discussion of the topic. In particular, survey will be done to assist to provide more original data for analysis purpose.

 

3.4    Data Collection

 

As agreed by some famous researchers from the Harvard Business School, primary data and secondary data are not distinguished by whether these data are collected by the researcher or not, i.e. first hand or second hand, but by the relevance these data are related to the topic to be studied:

 

Primary data adopted in this study will be consisting of the following:-

 

An original online survey targeting at the domestic investors

News report (both paper based and internet based); and

Books & Journals related to debt crisis.

 

Secondary data will cover other publications as well as similar studies done and referred.

 

3.5    Sampling

 

Random sampling will be done and the sample volume was set as 100. Though a simple random sample (‘SRS’) which refers to all the subsets of the frame are given an equal probability (Vasarhelyi 1995) would be difficult since by doing an online research those who do not frequently visit the internet would probably be excluded from participating the survey, we still strive to achieve a random sampling by giving the majority of the Chinese investors a chance to be part of our survey.

 

3.6    Data Analysis

 

Data analysis refers to the use of descriptive and inferential statistical techniques to transform raw data into information that is easier to manipulate, understand, and report (nrepp.samhsa.gov 2010). Both qualitative analysis and quantitative analysis (such as contingence) will be adopted to achieve the research targets.

 

3.7    Limitations

 

The major limitations are:-

 

l  Some domestic investors may not have the access to internet and thus can’t participate our survey;

 

l  The same scale may not be big enough leading to the lack of high accuracy of the data and conclusions;

 

l  Some surveyed investors may not have sufficient knowledge about the local government debt crisis;

 

4.        CHAPTER FOUR: ANALYSIS

 

4.1    Part I: Respondent Details

 

Chart 2 The gender ratios of the respondents

Chart 2The gender ratios of the respondents

 

In term of gender ratio of the respondents, it is found out that 53% of the surveyed respondents are male while the rest 47% are female. This percentage shows that female investors play almost the same important role in investment activities in China compared with their male counterparts. This finding also in accordance with an online study done in 2012 which showed that 51% of the investigated investors were male while 49% of the respondents were female and the study also pointed out that female investors had gained independence in investment activities in China with the rapid changes happening in China (jrj.com.cn 2012).

Chart 3 The age groups of the respondents

Chart 3 The age groups of the respondents

 

Regarding the age grouping of the surveyed respondents, young investors accounted for the majority of the respondents. Looking at the sub-groups, 27% of the surveyed investors are aged from 25 or below, the same percentage (27%) is also found in the age group ranged from 25 to 30; the large age group is found in 31 ~ 40 with 30% of the respondents are found falling into this age group; those falling into 41~50 age group account for 10% of the total surveyed investors; 4% of them are aged from 51 to 60 while the rest 2% respondents are aged 61 or above. Regarding the gender percentage, male and female investors account for almost 50% respectively in each age group listed above.

Chart 4 The income level of the respondents

Chart 4 The occupations of the respondents

 

In respect of the current occupation of the surveyed respondents, 45% of the respondents are company staffs indicating that almost half of the investors surveyed are still working thus the job of investor is considered as the part-time job of these people; 19% of them are working in institutions or government funded units; 13% of them are actually Freelancers; the percentage of students reached 9% indicating that students are also active in investments activities in China; 6% of the respondents are company administration; and the individual businessman and retired accounted for 7% and 1% respectively. In general, the distribution of respondents in different occupations indicates that role of investor is considered by the majority of the respondents as a part-time job and few of them work as a professional investor.

Chart 4 The occupations of the respondents

Chart 4 The income level of the respondents

 

In term of the monthly income of the investors surveyed, 10% of the respondents have no income at all; 12% of the surveyed investors have a monthly salary of below RMB 2,000; those who have a monthly salary between RMB 2,001 to RMB 3,000 account for 32 percentage of the total respondents and this income group is the large group among the classified groups; those who have a monthly salary between RMB 3,001 to RMB 5,000 account for 28 percentage of the total respondents; those with a salary between RMB 5,001 ~ RMB 8,000 and RMB 8,000 or above account for 12% and 6% of the total surveyed investors respectively. Since China Average Yearly Wages was reported as 46769.0 CNY in December of 2012 (or RMB 3,897 per month) (tradingeconomics.com 2012), in comparison in our survey more than a half (54%) of the respondents are having a monthly salary of less than 3,000, thus we can see that lower income investors account for more than a half of our surveyed investors. And few of them are having a high monthly salary as only 6% of the respondents are earning more than RMB 8,000 per month.

 

 

4.2    Part II: Reasoning the Local Government Debt Crisis

Chart 6 The most likely scale of the Local Government Debt

Chart 6 The most likely scale of the Local Government Debt

 

As mentioned earlier, according to the recently released research report by the research team of the Standard Chartered Bank, the estimated size of local government debt in China could reach 21.9 to 24.4 trillion yuan accounting for 38-42% of the national GDP, nearly twice the value of the current official estimates which had been released in 2011 with no official updates in the following time. And according to our survey, the majority of the surveyed respondents (45%) agreed that the estimated size of local government debt in China could reach between 21 trillion yuan to 30 trillion yuan, i.e. twice or triple of the data released by the government and it is close to the estimation of the Standard Chartered Bank. With only 24% of the respondents agreed that the estimated size of local government debt in China is 10 trillion yuan or less, a relatively small proportion of respondents actually estimated the number to be close or smaller than the government estimated data.

Chart 7 The main reasons behind the local government debts crisis in China

Reason A. The local governments are not allowed holding debts legally
Reason B. There isn’t a limit set for the local government debts
Reason C. The local governments are spending too much than they can afford
Reason D. The GDP as a top priority political system encourages the local government to spend more
Reason E. The easy monetary policy
Reason F. Others

Chart 7 The main reasons behind the local government debts crisis in China

 

In term of the main reasons behind the local government debts crisis in China, 63% of the surveyed respondents agreed that the fact that the local governments are not allowed holding debts legally had contributed to the difficulty of the monitoring of the local debts since the local government would have to finance under cover of various financing vehicles. And 32% of the respondents believed that due to the fact that there isn’t a limit set for the local government debts (local governments are not even allowed to bear debts, thus there would be any limits), and therefore the local government could have as much debts as they desire theoretically. Also, 86% of the respondents agreed that the local governments are spending too much than they can afford which lead to the debts crisis. And 90% of the respondents believed that the debt crisis is an inherent problem as the “GDP as a top priority” political system encourages the local government to spend more. 57% of the respondents also blamed the easy monetary policy for resulting in the local government debts crisis.

 

4.3    Part III: Impacts of Local Government Debt Crisis

Chart 8 Investment confidence reduced by concern over the possible Local Government Debt Crisis in China

Chart 8 Investment confidence reduced by concern over the possible Local Government Debt Crisis in China

 

Based on the answers regarding the investment confidence reduction due to the concern over the possible Local Government Debt Crisis in China, an average of 24.5% confidence loss is calculated despite that 23% of the respondents claimed that their investment confidence was unaffected. On the other hand, 36% of the respondents believed that their investment confidence was reduced by at least 31% or above.

Chart 9 Possibility of Local Government Debt Crisis in China’s impacting the economic recovery and further growth

Chart 9 Possibility of Local Government Debt Crisis in China’s impacting the economic recovery and further growth

 

With 79% of the respondents strong agreed that the Local Government Debt Crisis in China will impact the economic recovery and further growth and another 8% somewhat agree with this view of point. Most respondents believed that the Local Government Debt Crisis in China will impact macroeconomic stability.

Chart 10 The worst impact of the burst of local government debt crisis

Chart 10 The worst impact of the burst of local government debt crisis

 

15% of the respondents believed that the worst impact of the burst of local government debt crisis is the involved local projects being put on hold; 33% of the respondents believed that the worst impact of the burst of local government debt crisis is the generation of vast bank bad debts; and the majority of the respondents (52%) suggested that the worst impact of the burst of local government debt crisis is that the local economy development becomes stagnant.

Chart 11 Private capital formation being crowded out by government borrowing

Chart 11 Private capital formation being crowded out by government borrowing

 

During the past global financial crisis, China had increase the government debts due to the approaching of proactive fiscal policy and loose monetary policy, based on this background, according to the respondents, 91% of them claimed that the private capital formation had been crowded out by the government borrowing and in particular 82% of the total respondents strong agreed with this view of point.

 

4.4    Part IV: Solutions and Suggestions to the Resolution of the Local Government Debt

Chart 12 Local government’s issuing bond will be a good solution to the current “Local Government Debt Crisis in China”

Chart 12 Local government’s issuing bond will be a good solution to the current “Local Government Debt Crisis in China”

 

With 75% of the respondents either strong agree or somewhat agree with the saying that local government’s issuing bond will be a good solution to the current “Local Government Debt Crisis in China”, most people support the trail of the government bond in solving the debts crisis.

Chart 13 Local government’s issuing bond will be a good solution to the current “Local Government Debt Crisis in China”

Chart 13 Local government’s issuing bond will be a good solution to the current “Local Government Debt Crisis in China”

 

86% of the respondents strongly agree with the saying that the local government’s issuing bond will be a lower cost way to finance the government expenditure instead of the current local government debts. And only 2% of the respondents opposed the claim.

Chart 14 Purchasing of local government bond (if any) as a safe investment channel

Chart 14 Purchasing of local government bond (if any) as a safe investment channel

 

95% of the respondents considered the purchasing of local government bond (if any) as a very safe investment channel.

Chart 15 High-quality government debt management can help reduce the government’s debt-serving costs

Chart 15 High-quality government debt management can help reduce the government’s debt-serving costs

 

93% of the respondents agreed that the high-quality government debt management can help reduce the government’s debt-serving costs and thus reduce the chance of local government debts crisis with only 1% of the respondents strongly opposed the view.

 

5.        CHAPTER FIVE: CONCLUSION & RECOMMENDATIONS

 

5.1    Conclusions

 

In term of the scale of the local government debts, more than a half of the respondents agreed that the scale of local government debts could reached 21 trillion yuan or above, which is close to the estimation of the Standard Chartered Bank. And the government seems to lose its credit in the accuracy of the published data. And also the updating frequency of the published data is often found as out of date.

 

Based on the answers regarding the investment confidence reduction due to the concern over the possible Local Government Debt Crisis in China, an average of 24.5% confidence loss is calculated. And most respondents believed that the Local Government Debt Crisis in China will impact the economic recovery and further growth and 91% of the respondents claimed that the private capital formation had been crowded out by the government borrowing.

 

With 75% of the respondents either strong agree or somewhat agree with the saying that local government’s issuing bond will be a good solution to the current “Local Government Debt Crisis in China”, most people support the trail of the government bond in solving the debts crisis. And most of the respondents strongly agree that local government’s issuing bond will be a lower cost way to finance the government expenditure instead of the current local government debts. Also enhancement of high-quality government debt management is widely believed to be able to reduce the government’s debt-serving costs

 

5.2    Recommendations

 

5.2.1            Bond issued by local government can provide a lower cost way of financing

 

Based on the above analysis and survey over the possibility of the introduction of local bond as an alternative way to finance to local government, it is found out that most surveyed domestic investors believed that expanded local bond issuance could enable many localities to cut borrowing costs with lower yields in comparison with the interests rate paid for the banking borrowings. And also the issuance of local bonds is practicable as most investors claimed that they would consider the local bonds credited by the local governments as a very safe investment product.

 

5.2.2            Establish high-quality government debt management system

 

It is agreed by the majority of the respondents that a high-quality government debt management system can help with the reduction of a government’s debt-servicing costs by reducing the credit premium and the liquidity premium in the term structure of interest rates for government securities. Therefore, it is recommended that the Chinese local government shall establish high-quality government debt management to ensure the government debts management is prudent as well as being put under well control and close monitor. When the government debts are well managed, it is believed that the chance of happening of the local government debts crisis can be reduced largely.

 

5.2.3            Establish a regular publishing and alert system regarding the updated summary of the local government debt

 

With the loss of credit on its published data and a key reasons behind such loss of credit being that out of date data is often found, it is recommended that a more transparent and regular information publishing system offering the summary of the updated local government debts and based on this system, the central government or local governments could be alerted in an early timing which offers time to take measures before a real burse of local government debt crisis.

 

 

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Appendix: Online Survey Titled “Reasons, Impacts of and Solutions for Possible Local Government Debt Crisis in China & the Influences over the Domestic Investment Confidence”

 

Thank you for spending time on this survey custom made to facilitate the study “China’s Policy Response to Avoid the Possible “Local Government Debt Crisis” and Evaluation of the Influences over Domestic Investment Confidence”, please learn that due to the specific need of this paper only domestic Chinese investors are invited to join this survey (both part time or full time investors are entitled to join this survey).

 

Part I: Respondent Details

What is your gender?

  • Male
  • Female

What is your age?

  • 25 and below
  • 26 – 30
  • 31 – 40
  • 41 – 50
  • 51 – 60
  • 61 & above

What is your current occupation?

  • Company staff
  • Personnel at institutions / government units
  • Freelancers
  • Students
  • Company Administration
  • Individual businessman
  • Business men or women
  • Retired

What is your monthly income?

  • No income at all
  • < = 2000
  • 2001 – 3000
  • 3001 – 5000
  • 5001 – 8000
  • 8000 and above

Part II: Reasons for Local Government Debt Crisis in China

 

27th Jun 2011, according to a report by the National Audit office, the total local government debts amounted to 10.7 trillion Yuan. Within this 10.7 trillion, 6.7 trillion Yuan of that (62.62% of total) was debt owed by the government, 2.3 trillion Yuan (21.9% of total) was debts guaranteed by the government. The rest is contingent liabilities, which amounted to 1.7 trillion Yuan (15.58% of total) (audit.gov.cn 2011). According to the recently released research report by the research team of the Standard Chartered Bank, the estimated size of local government debt in China could reach 21.9 to 24.4 trillion yuan accounting for 38-42% of the national GDP, nearly twice the value of the current official estimates.

 

What is the likely scale of theLocal Government Debt Crisis in China in your understanding?

  • RMB 5 Trillion and Below
  • RMB 6 Trillion – RMB 10 Trillion
  • RMB 11 Trillion – RMB 20 Trillion
  • RMB 21 Trillion – RMB 30 Trillion
  • RMB 31 Trillion and Above

 

What are the main reasons behind the local government debts crisis in China?

 

  • The local governments are not allowed to hold debts legally
  • There isn’t a limit set for the local government debts
  • The local governments are spending too much than they can afford
  • The GDP as a top priority political system encourages the local government to spend more
  • The easy monetary policy
  • Others


Part III:
Impacts of Local Government Debt Crisis in China

 

How much your concern over the possible Local Government Debt Crisis in China affects your investment confidence within China?

 

Investment confidence reduced by    %. (0~100%)

 

Do you agree with the saying that the Local Government Debt Crisis in China will impact the economic recovery and further growth?

 

  • Strongly agree
  • Somewhat agree
  • Not sure
  • Somewhat disagree
  • Strongly disagree

 

If theLocal Government Debt Crisis in China bursts suddenly, which of the following will you think would be the worst impact?

 

  • The involved local projects being put on hold
  • Generation of vast bank bad debts
  • Local economy development becomes stagnant

 

During the past global financial crisis, China had increase the government debts due to the approaching of proactive fiscal policy and loose monetary policy, do you agree that the private borrowing had become more difficult or the private capital formation had to some extent crowded out?

 

  • Strongly agree
  • Somewhat agree
  • Not sure
  • Somewhat disagree
  • Strongly disagree

 

Part IV: Solutions for Local Government Debt Crisis in China


Do you agree with the saying that the local government’s issuing bond will be a good solution to the current “Local Government Debt Crisis in China”?

 

  • Strongly agree
  • Somewhat agree
  • Not sure
  • Somewhat disagree
  • Strongly disagree

 

Do you agree with the saying that the local government’s issuing bond will be a lower cost way to finance the government expenditure instead of the current local government debts?

 

  • Strongly agree
  • Somewhat agree
  • Not sure
  • Somewhat disagree
  • Strongly disagree

 

How possible will you choose to buy the local government bond (if any)?

 

  • Strongly possible
  • Somewhat possible
  • Not sure
  • Somewhat impossible
  • Strongly impossible

 

How safe will you consider the purchasing of local government bond (if any) as an investment channel?

 

  • Very safe
  • Somewhat safe
  • Not sure
  • Somewhat insecure
  • Strongly insecure

 

How possible will you consider the high-quality government debt management can help reduce the government’s debt-serving costs and thus reduce the chance of local government debts crisis?

 

  • Strongly possible
  • Somewhat possible
  • Not sure
  • Somewhat impossible
  • Strongly impossible

 

 

Your time & efforts is very much appreciated! Goodbye!

 

 

[1]As reported by the Wall Street Journal, China passed Japan in 2010 to become the world’s second-largest economy after the U.S., a historic shift that has drawn mixed emotions in the two Asian powers: resignation tinged with soul-searching in long-stagnant Japan, pride but also caution in an ascendant China wary of shouldering new global responsibilities.

[2] In particular, the term “general obligation” typically refers to a bond issued by a state or local government that is payable from general funds of the issuer, although the precise source and priority of payment for general obligation bonds may vary considerably from issuer to issuer depending on applicable state or local law.

[3]Revenue bond” is the term used generally to describe a bond that is payable from a specific source of revenue and to which the full faith and credit of an issuer with taxing power is not pledged.

[4] The term “double-barreled bond” is used to describe bonds secured by a defined revenue source.

[5] The term “moral obligation bond” refers to a bond, usually issued by a state or agency, that is secured by a non-binding covenant.