Hunan and Yunnan are using special-purpose bond funds to balance their books, the first provinces to do so as Beijing stresses financial risk control.<\/b>
\nHunan has become the first province in China to use the proceeds of special-purpose bonds to guarantee government payments to enterprises, with 20 billion yuan (US$2.78 billion) allocated for this year.
The inland province made the adjustment to its annual fiscal budget last month, marking the first time the bonds \u2013 typically earmarked for revenue-generating construction projects \u2013 will be used to cover government arrears.
Proceeds will be distributed based on eligible outstanding debts from existing investment projects, according to a statement from the province\u2019s department of finance issued last week. The department said the disbursements will be prioritised to help cities and counties across Hunan complete ongoing construction, clear their obligations and reduce fiscal risk.
David Wong, a lecturer at Hang Seng University in Hong Kong, called the move \u201ca step in the right direction,\u201d but warned that the 20-billion-yuan sum could be \u201ca drop in the bucket\u201d compared with the scale of local government debt.
\u201cIt remains unclear which arrears will be prioritised or which firms will actually receive payments,\u201d he said. \u201cThe more complex issue is that this is not simply a matter of \u2018government owing enterprises\u2019 but a complex web of entangled triangular debts.\u201d
Criss-crossing chains of obligation make the repayment picture opaque for a number of localities, Wong said.
\u201cIn many cases, local governments have indirectly incurred debts through state-owned enterprises (SOEs), which in turn owe money to each other. Some SOEs are involved in circular guarantees and cross-debt relationships with both local governments and private companies.\u201d<\/p>\n