China's heavily-indebted local governments may be about to receive another 1 trillion yuan

Having already implemented a 2 trillion yuan debt swap to reduce borrowing costs for heavily indebted local governments, China is now considering increasing that figure by an additional 1 trillion yuan.

Bloomberg, citing sources familiar with the matter, suggests the plan has yet to be finalised because the Ministry of Finance needs to discuss it with the National People’s Congress and seek State Council approval.

Debt swaps, essentially converting high-interest, shorter-duration debt to low-interest, longer-duration liabilities, have been implemented to reduce the debt burden carried by local governments and their subsidiaries, freeing up capacity to invest in necessary infrastructure projects.

Local authorities have 1.86 trillion yuan of debt that matures in 2015, as well as a further 919.3 billion yuan in contingent liabilities, according to a government audit report based on data as of June 2013.

Zhao Yang, chief China economist at Nomura Holdings in Hong Kong, believes the debt swaps amount to quasi monetary policy easing for local government authorities.

“This is virtually the central government offering local authorities more credit and targeted interest-rate cuts. The additional quota will benefit the economy because lower costs of government-led projects will help boost investment.”

Local authorities have issued about 1.2 trillion yuan of bonds so far this year, including 700 billion yuan of debt-swap notes, according to data compiled by Bloomberg.

China’s Ministry of Finance, on its website yesterday, confirmed the municipal debt issued can be used as collateral for banks to receive treasury deposits, increasing both demand and market liquidity.

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