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How Residents Become Creditors of Local Governments

Time Weekly published an article on how residents can become creditors of local governments when city commercial banks act as the middleman.

In China, only the central government can issue bonds. Local governments do not have the authority to issue bonds. However, there is a proven and popular mechanism that local governments use the enable residents to become the creditors of local governments.

First, the local government establishes an investment company; this is the “Local Government Financing Platform.” Then the local government announces new infrastructure programs such as highways, airports, or office buildings. The financing platforms proceed to contact local city commercial banks for loans to fund these programs. Because the financing platforms are government backed and the loans fund government programs, the loans are issued smoothly. However, fully aware of the risks, the city commercial banks turn around and sell the debts to trust companies which re-package the loans into “financial products.” The trust companies ask the city commercial banks to promote these “financial products” to customers of the banks. The salespersons at the banks review resident’s bank accounts and then start making sales calls. Soon residents find that they themselves have become creditors of the local government.

[Editor’s note: The city commercial banks are a significant group in the Chinese banking market. Most of them used to be urban credit cooperatives. In 1998, the People’s Bank of China ordered that all urban cooperative banks change their name to city commercial banks. These banks have strong ties to their local government, are majority or wholly state owned, and are known for financing local infrastructure and other government projects.]

Source: Time Weekly, May 30, 2013