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China local govt bond issuance falls amid Beijing's deleveraging drive

SHANGHAI, Dec 26 (Reuters) - Bond issuance by China's local governments fell nearly 30 percent in 2017 from the previous year as Beijing stepped up its deleveraging campaign and punished reckless borrowing.

Local municipalities have raised roughly 4.34 trillion yuan ($662.90 billion) this year, compared with 6.05 trillion yuan in 2016, according to official data.

In 2015, when Beijing officially allowed the issuance of local government bonds, municipalities raised 3.84 trillion yuan.

This year's reduction in fundraising by local governments reflect a slowdown in the so-called bond-for-debt swap program. The program allowed local governments to issue low-yield municipal notes to replace legacy liabilities, often accumulated through costly borrowings by local government financial vehicles (LGFVs).

The reduction also reflects the impact of rising market rates engineered by the central bank, which has pushed up the cost of borrowing and made local governments less willing to sell bonds.

"If the (local bond) program doesn't slow down, money would flood from lenders to local governments, which is against the government's will to deleverage," said Zheng Lianghai, bond analyst at Caitong Fund Management Co in Shanghai.

He added that in China, the central government needs to strictly control the leverage of local governments, just like "parents cannot let children have too much pocket money because they're likely to squander it."

Local governments in China, which before 2015 were unable to issue bonds, previously used LGFVs to raise money to fund economic growth, resulting in massive liabilities which now threaten financial stability.

To defuse debt risks, Beijing has banned local governments from borrowing recklessly, or providing repayment guarantees for their liabilities.

China's finance ministry on Friday meted out punishments for several cases of city and county governments providing illegal debt-financing guarantees.

Xu Zhong, head of the People's Bank of China's research bureau, wrote in an editorial on a financial news website on Monday that China needs to let local governments take responsibility for their finances, including allowing bankruptcies. ($1 = 6.5470 Chinese yuan) (Reporting by Samuel Shen and Brenda Goh; Editing by Richard Borsuk)