standards and clean up their non-performing loan portfolios. The increased scrutiny of the balance sheets of the banks means that it is no longer easy for the local government entities to roll-over old debt at convenient terms. However, the incentive structure – supported by current political economy – continues to point against outright loan default or write-offs. Importantly, the banking sector has continued to extend credit to local government entities because of: (a) excess liquidity and strong competition in the market, (b) low capacity of the banks to conduct credit appraisal, and (c) implied guarantees of the local governments. The continued ineffectiveness of the private market to make credit-based investment decisions vis-à-vis the borrowing by local government entities has forced the GOC to move cautiously on the development of other channels of capital supply for infrastructure. For example, the MOF has continued to rely upon a very conservative case-by-case review of the applications for corporate bonds by local government entities, instead of
97 establishing a rule based system for the local government entities to issue corporate bonds. The anticipated policy changes for establishing a framework for the issuance of municipal bonds appears to be moving at a very slow pace.
98 ANNEX 3. CHONGQING BACKGROUND Geographic Location Chongqing located in the Southwest part of China by the Jialing River and the upper reaches of the Yangtze. Its geographic position makes Chongqing a strategic hub connecting the East and the West of China. It adjoins five provinces: Sichuan, Hubei, Hunan, Guizhou, and Shaanxi. Chongqing is one of the four provincial-level municipalities in China that are directly administrated by the central government. With an area of 83,000 square kilometers and a population of more than 31 million, the Chongqing municipality includes 43 districts, counties, and autonomous counties. It is the only transportation hub that provides waterway, highway, and airborne channels to the West part of China. There are five cross-country highways connecting East–West and South–North parts of China that intersect in Chongqing. 3,000-ton ships can directly travel in the Yangtze River from Shanghai ports to Chongqing ports. The Chongqing Jiangbei International Airport is also classified as one of the national key air traffic hubs in the nation Economical Status Chongqing is the economic powerhouse of the Southwest and the upper region of the Yangtze River. As one of the four provincial municipalities in China, Chongqing is a modernized port city that plays an important role in regional and national economic development. Chongqing is one of the oldest and fastest-growing industrial bases in China. It is also the major distribution center for the electricity network in the West. The establishment of Chongqing Municipality has accompanied the upgrading of old industrial bases and large-scale investments in infrastructure. The city has also experienced unprecedented migration due to the construction of the Three Gorges Dam.