(Yicai) June 13 -- Hunan has become the first province in China to allocate part of the proceeds from the sale of special‑purpose bonds to paying businesses owed money by local governments at all levels, paving the way for broader regional support of small firms.

CNY20 billion (USD2.8 billion) of the CNY146.5 billion (USD20.4 billion) of special bonds that Hunan will issue this year will go to settle debts owed to companies, according to the provincial government’s recently released annual budget adjustment plan.

Local governments in China borrow money through the sale of special bonds, usually to finance infrastructure and public welfare projects. This marks the first time that a province has pledged to use the funds raised to clear government arrears to enterprises -- a precedent other provinces are expected to follow.

Earlier this year, the central government expanded the allowable uses of special bond proceeds to include the repayment of business arrears, resolution of hidden local government debt, and the purchase of unsold homes for conversion into public housing.

The innovation is part of the central government's latest attempt to break entrenched debt chains, according to Wen Laicheng, a professor at the Central University of Finance and Economics, who added that it should be seen as an emergency stopgap. 

Hunan’s CNY20 billion allocation represents nearly 14 percent of its annual special bond quota, Wen pointed out. Nationally, he estimates it could exceed 10 percent. Based on discussions with local authorities, Hu Hengsong, deputy general manager at Caida Securities, expects the national average could reach between 15 percent and 20 percent.

Accounts receivable at large industrial firms had reached CNY26.06 trillion (USD3.6 trillion) as of Dec. 31 last year, an annual increase of nearly 9 percent, according to data from the National Bureau of Statistics. Small and medium-sized enterprises have also seen significant growth in receivables, as lengthening payment cycles continue to test their financial resilience.

Though a short-term measure, using special bonds to pay arrears could have long-term benefits. While local governments are still responsible for repaying the bonds, Wen noted that future repayments could potentially be covered by general public budget funds, if needed.

Hu explained that settling these arrears is designed to bolster the viability and operations of SMEs, which in turn could help to stabilize local tax revenues. He added that local authorities may also issue special refinancing bonds to extend repayment deadlines until fiscal conditions improve, at which point public funds could be used for settlement.

Editors: Emmi Laine, Tang Shihua