China Said to Double Local Bond-Swap to Defuse Debt Bomb

China has granted another 1 trillion yuan ($161 billion) quota to provinces to swap high-interest debt into low-cost bonds, doubling the previous amount, according to people familiar with the matter.

The increase comes as the first stage of the bond swap is under way. Commercial banks have been buying such bonds after the central bank flooded the interbank market with cheap funds. The Ministry of Finance didn’t immediately reply to a fax seeking comment on the enlarged quota.

The expansion will help the government cut risks from a record surge in borrowing that local authorities took on to fund a glut of investment projects. The process -- which includes inducements for banks to buy new, longer-maturity, lower yielding bonds -- is alleviating a funding crunch among provinces that had threatened to deepen the economy’s slowdown.

Local-government obligations may have reached 25 trillion yuan, bigger than the size of the German economy, according to estimates from Mizuho Securities Asia Ltd. That compares with the figure of 17.9 trillion yuan as of June 30, 2013 given by the National Audit Office.

Bloomberg News on June 1 reported policy makers were considering the plan to increase the clean-up program. The Economic Observer Thursday reported the additional allocation, citing an unidentified person.

— With assistance by Xin Zhou, and Steven Yang

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