China is pushing forward with a plan to allow the issuance of 200 billion yuan ($29.2 billion) worth in provincial government bonds to fund projects related to the country's economic stimulus package, Chinese media reported March 10, following statements from the ongoing National People's Congress (NPC) session. A member of the financial and budget committees said the State Council is amending a budget law to permit the issuance of provincial bonds by the central government. A spokesman for the finance ministry claimed the funds will be distributed mostly to China's underdeveloped central and western regions. The local debt issuance plan is not what it first appeared to be. Initially the concept was that local governments would issue their own debt in order to bankroll major infrastructure development and public works programs. The idea emerged because, at present, the provinces are not allowed legally to run budget deficits (though they often do so unofficially). Bonds were to provide the provinces with a source of capital other than the national banks or informal lenders. When China unveiled its $585 billion stimulus package, the provincial bond issuance proposal gained ground as a means for provincial governments to finance the projects associated with the package that were not being funded by the central government directly or through loans from the big policy banks. There were obvious risks with such a scheme. It would have given provincial governments the power to control their own development, potentially acting independent from the central government, or without coordinating with neighboring regions. By formally allowing provinces to operate on deficits, there was a risk that provincial governments would drive themselves deep into debt and end up begging for central government bailouts. There were also fears that provincial debt issuance could be abused by China's notoriously corrupt provincial authorities to benefit themselves and their cronies, without achieving any of the central government's aims of accelerating development or modernization. Moreover, bond issuance along local lines would ensure that wealthier, more experienced provinces (such as the coastal regions) would receive all the attention of investors, while the central and western regions that need funds the most would be neglected. With the details revealed on March 10, however, Beijing appears to have avoided some of these problems. The central government will issue the bonds on behalf of the provinces and distribute the funds itself. The bonds will be issued in the same way as national government bonds, so as to cut costs, take advantage of the government's strong credit rating (as compared to the unrated individual regions), and attract a larger pool of investors. The ministry of finance will also allocate the proceeds so that the underdeveloped provinces will receive the lion's share. The result will give the provinces a new source of much needed capital, while Beijing bears the risk and maintains leverage over the provinces whose bonds it sells — leverage that can be used to centralize the country and rein in errant provincial officials. Still, the central government has not ruled out the possibility that provinces will one day be able to issue their own debt directly, if a credit rating system can be devised, or if the economy deteriorates to the point that bolder measures are required to provide provinces with capital. But some in Beijing would prefer not to extend this freedom to the provinces — and at the moment they are getting their way, while still developing a useful means of financing stimulus projects.