China’s 1-trillion RMB swap plan targets local government debt

BEIJING - In order to address the issue of mounting local government interest repayment pressure on their debts, China’s Central Government has ordered a swap plan totalling RMB 1 trillion (US$160 billion) of low-yield municipal notes to replace legacy liabilities. Speculation in Chinese domestic media regarding the plan had expected the swap to be for RMB 3 trillion -  total liabilities for local government are estimated by brokerages to exceed US$3 trillion.

The Ministry of Finance said in a statement that the action could reduce payments by RMB 40 billion to RMB 50 billion per year, giving local authorities room to boost other spending.

Analyst Zhang Li said “the risk of repaying matured obligations can be significantly reduced, which is good for market sentiment.” As China aims to accelerate fiscal spending to maintain a growth target of 7%, the central government is aiming to rein in local government borrowing. www.webershandwick.cn (ATI).