(Yicai Global) Dec. 7 -- The value of special bonds issued by Chinese local governments so far this year to finance infrastructure, utility, energy and other public welfare projects, has hit a record high. But, despite a slump in fiscal revenue, repayment risks are controllable, a chief economist told Yicai Global.

“Although the risks are higher this year than last year, with the repayment guarantee ratio falling to between 3.8 and 3.9 from 5.1, the risks generally remain secure and under control, Luo Zhiheng, chief economist at Yuekai Securities, told Yicai Global.

More than CNY4 trillion (USD572.4 billion) of special bonds has been issued by Chinese local governments so far this year, the most ever, bringing the total level of such debts to CNY20.7 trillion (USD2.8 trillion), according to the latest data from the Ministry of Finance. When including general debt, local governments owe an eye-watering CNY35.1 trillion (USD5 trillion).

Yet local government revenue has declined sharply this year. Revenue from local government funds, one of the main sources of capital to repay debts, tumbled 24.3 percent in the first 10 months from the same period last year to CNY4.8 trillion (USD694.8 billion), the ministry said, while sales of land-use rights slumped 25.9 percent over the period to CNY4.4 trillion (USD630.5 billion).

“Since the beginning of this year, local governments have been strengthening supervision of special bond projects, improving the efficient use of these funds as well as project quality. It means the projects themselves are able to generate more funds for debt repayment and has to some degree mitigated the risks,” Luo said.

Although income from the sales of land-use rights is still an important source of revenue to repay special bonds, most of the special bonds issued since 2017 are mostly backed by earnings from completed projects, which helps reduce risk, Mao Jie, professor at the University of International Business and Economics, told Yicai Global.

Easing Pressure

On the other hand, local government have rolled out a huge number of policies to stabilize the property market this year to mitigate the adverse impact of a sluggish real estate sector on the economy, Luo said. So the downward pressure on local government funds should start to ease next year.

Local government revenue is likely to continue to dwindle next year, but by much less than this year, which will help to ease repayment pressure, he said.

Repayment of the interest on current debts is also generally controllable, Luo said. But there is a danger of an increase in risks regarding payment and restructuring in some districts and counties.

To lower risks, governments should optimize their structuring of debts, he added. They should hike the proportion of national debt and general debt and trim that of local government debt and special bonds.

Editors: Tang Shihua, Kim Taylor