Guangdong leads China's municipal bond issuing pilot

The move to gradually allow local governments to raise funds from the bond market on their own is part of an effort to deflate risks stemming from reckless financing in the shadow banking sector, where local governments have borrowed through entities created for financing purposes to fund projects that may not generate enough cash flow to pay back interest.

Guangdong helps kick off new era

Local governments 'need to refinance debt'

The growing amount of obligations local governments have taken on in the years after the global financial crisis are deemed as one of the major risks facing the world's second-largest economy. A national audit released late last year showed that local governments in China had a debt obligation of 10.88 trillion yuan by the end of June 2013.

The funds local governments have indirectly borrowed through other proxies tend to have short maturities and analysts fear that such reckless borrowing will be unsustainable in the long run as short-term loans are used to fund long-term projects.

At 1.02 trillion yuan as of the end of June 2013, Guangdong has the second-largest debt obligation among all provinces and municipalities in China.

The bond issued on Monday will be traded on the interbank market and the country's securities exchanges in Shanghai and Shenzhen. It has also received a rating of AAA -- the highest grade assigned to a debt product -- from domestic credit agency Shanghai Brilliance Credit Rating & Investors Service Co Ltd.

The rating is higher than the AA and AA+ assigned to the majority of bonds issued by local government financing vehicles, suggesting the issuer's strong ability to repay.

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