China's monetary policy to remain accomodative further as indebtedness clouds growth outlook

The local financial media in China reported that China has plans to swap another CNY11.5 trn local government debt to bonds, in next two years. At present, the volume outstanding in China's onshore bond markets is about CNY 44trn.

In 2015, China is likely to issue CNY 3.2 trn local government bonds to replace this debt with short term and high costs of funding. While there will be pressure on bond markets from increased supply of local government bonds, it will also support alleviation of local government's debt burden.

The fiscal revenue for local governments will be under pressure in next year as well, due to further slow down of land sales because of property destocking in low-tier cities, suggesting that the indebtedness continues to cloud China's growth outlook.

"China's monetary policy will remain accommodative in the coming year, and we see further interest rate cut and multiple RRR cuts in 2016", says Commerzbank in a research note.