China's MoF announced yesterday it will double the local government debt swap program to CNY2trn (USD320bn). Under this program, local governments can convert their maturing loans into longer dated municipal bonds with lower rates. For example, loans of 1-3 years could be swapped for bonds with up to 7-9 years tenors, with interest rates down to around the 5Y government bond yield of around 3.2% vs 8-10% previously.
The new quota effectively allows for a complete restructuring of the estimated CNY1.9trn of local government debt due this year. The latest data from the National Audit Office has total local government debt at CNY17.9trn as of June-2013. This could also raise the total quota for local government bond issuance this year to around CNY2.6trn from just CNY400bn in 2014, notes Commerzbank.
However, implementation of the swap and a fulfillment of the quota could be a challenge, given some reluctance for banks to take on the debt. Overall, the latest announcement is consistent with the government's near term priority to alleviate default concerns for the local government funding vehicles (LGFV), reflate asset prices, ease the debt servicing burden, and to shore up growth. For USD-CNY, it continues to hold steady at around 6.2060, adds Commerzbank.
