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Municipal bonds - new ways to finance urban infrastructure construction

Author: LiuMingFang From: www.yourpaper.net Posted: 2009-04-01 05:24:47 Read:
Municipal bonds is the local government to meet the needs of the local economic development and social welfare undertakings, a bond issued to the society in accordance with the provisions of relevant laws, is a means for local governments to raise local funds for construction. Issuers of municipal bonds is a local government or its authorized agency, to raise funds for the construction of municipal infrastructure and social welfare projects. Different by the reimbursement funding sources and forms of security, municipal bonds are divided into two categories: one is the general debt obligations (GeneralObligationBond), it is to the credit of the local government and tax basis, to ensure that investors can be expected to recover the principal and obtain interest financing funds are often used for the construction of ordinary roads, airports, parks, and municipal facilities; another revenue bonds (RevenueBond) is the authorized local government agency (Enterprise) in order to invest in building an infrastructure bonds issued, including toll roads and bridges, tunnels, highways, water plants, sewage treatment plants, power plants and ports and other infrastructure, use these proceeds obtained by the facility operator to repay debt, the government does not use its own credit and tax to repay debt.
Municipal bonds is an important way for the construction of urban infrastructure financing. From the current situation in our country, and also to the use of municipal bonds for infrastructure financing. However, due to various reasons, in a foreign country proved to be very effective urban infrastructure financing tool - municipal bonds in the country has been in a restricted area.

Environmental analysis of the supply and demand of China's development of municipal bonds

, From the supply side

Urban infrastructure investment is characterized by a large amount of investment and long payback period, the effective cost of the investment is not easy sharing, which determines the government to invest in urban infrastructure should be. Urban infrastructure investment has increasingly become a financial burden countries. For the construction of infrastructure financing through the issuance of municipal bonds is a good way to make the national financial burdens. Its advantage lies in: 1. Investment in infrastructure construction over the next several years. Variety deadline of municipal bonds, short months, up to 30 years long; 2 can promote the transformation of savings into investment; 3. Competition between underwriters can reduce issuance costs; 4. Issued to the majority of investors The competition between the investor can reduce interest costs.
The above cost advantages, even if the issuer has issued desire, but also enhance the repayment ability of the issuer. Urban infrastructure has a strong positive external effects, and its completion can contribute significantly to economic development, which also strengthened the repayment ability of the issuers.
Of course, not all regions have the ability to issue municipal bonds. Infancy should let those who have the ability to issue to do, such as Beijing. In 2008, Beijing needs to invest 180 billion yuan to build urban infrastructure, while Beijing's annual fiscal revenue also more than 300 billion yuan. So look for other financing channels is necessary. On the other hand, the Olympics as an opportunity, and the completion of the infrastructure will inevitably generate huge economic benefits. According to the Beijing Municipal Bureau of Statistics estimated that the Olympic Games Beijing's economic growth will generate a pulling effect of two percentage points per year, which can provide a sufficient margin of solvency.

Second, from the demand side
First, more than 10 trillion of household savings deposit balance. If there is a suitable investment opportunities - the risk is not high, relatively high income, these savings into investment ratio will be very high. The high demand for government bonds is sufficient to illustrate this point.
Second, investment funds, insurance companies, pension funds and other institutional investors needs to diversify investment risks, they will also be important investors in municipal bonds. Particularly insurance companies, pension funds are more in need of long-term assets with their long-term liabilities ratio, and municipal bonds just to meet their needs. And the law on investment proportion of bonds in the portfolios of these institutions clearly defined. But the current bond market is too little variety, the phenomenon is very common bond reluctant to sell greatly limits their portfolio space.
Finally, China's capital market is badly in need of a new bond products to enrich the market. The health of the financial markets should be balanced structure. However, due to various reasons, China's financial market in the early stage of development, focuses on the development of the stock market, the bond market has been mainly in government bonds, corporate bonds issued very few transactions are not active. Well-developed capital markets, the United States, from 1970 to 1985, the United States of financing in the stock market accounted for only 2.1% of the total external financing, the amount of bond financing is almost 10 times the stock market. Very rich in variety and bond markets, money market bonds, federal agency bonds, municipal bonds and corporate bonds. Which occupies 11% share of municipal bonds. International experience from the point of view not only should the development of the bond market, the the bonds inherent risk is relatively low feature so that it can play the role of the capital market buffer. In recent years, the stock market instability, if the capital market to maintain a sufficient proportion of the bonds, the impact of such fluctuations on the economy will not be so dramatic.

Analysis and Countermeasures of China's development of the condition of the municipal bond

With supply and demand were not enough, the most critical problem is that China's budget law "clearly provides that the local government has not issued debt, while the state when it can give local governments issued debt depends on the conditions of the development of municipal bonds when. See from the experience of other countries, the development of the municipal bond conditions include: the introduction of relevant laws and regulations, the understanding and trust of investors in municipal bonds, an active secondary market, the credit quality of the bonds, the standard of information disclosure, independent bond rating agencies may refer the benchmark interest rate.
A sound municipal bond management regulations. This is necessary in any economic activity, but also the basic conditions. If not as soon as possible to establish regulations, some local governments also occur in disguise borrowing behavior is not conducive to the country's regulators.
2, the reference benchmark interest rate. China has formed a long short various term treasury bonds, and can be used as a reference for determining municipal bond interest rates.
3, the culture of the secondary bond market. Municipal bonds generally long duration, which means increased uncertainty, if there is no active secondary market, investors do not have a convenient exit mechanism, may face difficulties when they need the funds. Secondary bond market in China is not enough active exchange market trading was light, and the inter-bank market bonds reluctant to sell serious'd just opened the counter (OTC) brought us hope. In fact, the only bond varieties are rich enough, will have an active secondary market.
4 to improve the credit quality of the bonds. Although municipal bonds issued by local governments or their respective businesses, but it is also risky. From 1940-1994, the average default rate of 0.5% of the U.S. municipal bond. Can take some kind of subsidy to intercept mechanism for local government - that in order to guarantee the timely and full repayment of the debt, central government subsidies to local governments in the central persistence issuance size of the local government at the same time limit. The lower level of protection of the revenue bonds as collateral to other sources of revenue by the Government to improve the credit rating of the bonds.
5, the standard of information disclosure. This is the goal of a long way to go, it is critical for the development of the securities market as a whole.
6, the development of an independent rating agency. Bond rating is not a guarantee of debt service, in fact, issued by the United States in 1929 by the rating agencies, bond defaults in 1932, 78% had been rated AA or higher, 48% rated AAA. Rating agencies, focusing on quality, not quantity, has several including Credit, Emirates, they may lack the experience of the assessment of municipal bonds, so it is necessary to learn from other countries.
7, investors in municipal bonds are familiar with and trust. Facts have proved that the learning ability of our investors is strong, the key is to build trust. Stock market development has been enough to blow the trust of investors, that the consequences would be disastrous if the bond market is the recurrence of similar problems, so a variety of measures to be taken. We must first choose reputable the highest local governments and their institutions to conduct pre-trial, the standard must be strictly reference to developed countries proved effective standard commercial insurance can also municipal bond debt service. Some developing countries to take the approach of the central government guarantees, I do not think this is a good way. Maturity municipal bond market, there should not be a joint responsibility of the central government to local governments.

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