China Environmental Law

ChinaStakes.com carried an article on Monday which reported on some tentative steps to permit local governments to issue bonds in China. 

Local government revenues in China are in dire straights.  The article does a good job of explaining how this came to pass, but the bottom line is that

In recent years, local governments’ revenues have become increasingly dependent on leased land and real estate, dubbed “land finance.” . . . With the real estate market having gone sluggish, local government revenues have nosedived. Heavily indebted local government-owned construction companies find it difficult to obtain loans from banks. Projects invested in by governments face suspension or termination. Expanding domestic demand through investment by local governments has become well nigh impossible.

One way of aiding local governments and helping to stimulate the economy would be to permit local governments to issue bonds.  There are a number of hurdles, however, not the least of which, as the article notes, are the lack of transparency regarding local finances, slack financial management controls, and corruption.

A program designed to strengthen local debt management has been drafted by the Ministry of Finance (MoF) and submitted to the central government for approval after consultation.  ChinaStakes.com suggests that on the heels of this program Beijing may be willing to allow bond issuance by local governments.

What does this have to do with China’s environment?  One of the primary ways US cities pay for the construction of municipal infrastructure such as sewage treatment and drinking water plants is through the issuance of municipal bonds.  Although I’m not a “bond lawyer,” I think that the repayment of bonds of this type is generally secured by the revenue from the fees the city collects for the provision of sewage treatment and drinking water services.  A designated revenue stream, I assume, makes these type of bonds less reliant on the overall financial health of the local government entity, thus making them more attractive in China given the lack of transparency and poor general financial health of its local governments. 

A number of issues need to be worked out, including rationalizing the cost of the provision of sewage treatment and drinking water services and providing legal methods to insure that future revenue streams can be irrevocably committed to bond repayment.  In addition, in the US interest on municipal bonds is usually tax free, allowing for lower interest rates.  I suppose such a feature is not absolutely necessary, but it would make the bonds more attractive to cities. 

If China can develop a working system of municipal bond financing, it would be a great boom to the environment because it would provide a vehicle through which local governments could pay for sewage treatment systems which will significantly improve the condition of China’s waterways.