China Said to Consider Extra 1 Trillion Yuan Debt-Swap Quota

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China is considering allowing another 1 trillion yuan ($161 billion) of local government debt swaps, according to people familiar with the matter.

The plan has yet to be finalized because the Ministry of Finance needs to discuss it with the National People’s Congress and seek State Council approval, the people said Tuesday, asking not to be identified because the talks are private.

The new quotas will be in addition to the 2 trillion yuan already granted as part of a program to convert high-cost existing debt maturing this year into low-yielding municipal bonds. 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.

“This is virtually the central government offering local authorities more credit and targeted interest-rate cuts,” said Zhao Yang, chief China economist at Nomura Holdings Inc. in Hong Kong. “The additional quota will benefit the economy because lower costs of government-led projects will help boost investment.”

The Ministry of Finance didn’t immediately reply to a fax seeking comment Tuesday. A further expansion of the program will help regional authorities avoid a cash crunch, and alleviate risks in the financial system at a time when the weakest economic expansion since 2009 is hurting fiscal income.

Sales Plan

Local governments are set to issue 500 billion yuan in general bonds, which use fiscal revenue for repayment, and 100 billion yuan of special notes, which also rely on project income. In addition, the authorities can roll over 171.4 billion yuan of securities. A further 1 trillion yuan of debt-swap quotas will bring China’s total municipal bond issuance to around 3.8 trillion yuan this year.

An expansion would be in line with market expectations, with Citic Securities Co. and Standard Chartered Plc having already predicted additional quota allotments. Policy makers might announce another batch before the end of this year for local authorities to swap debt maturing next year, according to Standard Chartered.

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.

The Ministry of Finance restated Tuesday that municipal securities can be used as collateral for banks to receive treasury deposits, according to a statement on its website.

— With assistance by Steven Yang, and Helen Sun

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