China Expands Debt Swap Quota to 3.2 Trillion Yuan, Xinhua Says

China is raising the quota for regional authorities to swap high-yielding debt for municipal bonds to 3.2 trillion yuan ($500 billion), China’s Finance Minister Lou Jiwei said Thursday, as cited by Xinhua News Agency.

The change will help ease pressure on local governments to pay debt, the official news service said. Regional authorities had sold 1.4 trillion yuan of the bonds as of the end of July, Lou said. The nation announced a first batch of 1 trillion yuan in March and a second allotment of the same amount in June. Xinhua didn’t specifically give the size of the third increase.

“The plan will improve local governments’ fiscal strength and accelerate the implementation of investment projects, but it won’t reverse the downward trend of China’s economy in near-term,” said Liu Dongliang, a Shenzhen-based analyst at China Merchants Bank Co. Expansion of investment may worsen China’s industrial overcapacity and external demand will continue to weaken, Liu said.

The People’s Bank of China on Tuesday cut interest rates for a fifth time since November and reduced the amount of cash that lenders need to set aside as reserves. Premier Li Keqiang is seeking to defend a 7 percent economic growth goal at the same time as trying to keep local-government debt under control. The pool of regional liabilities has swelled to 25 trillion yuan, bigger than Germany’s economy, Mizuho Securities Asia Ltd. estimates.

Regional authorities should “offer necessary support” to their financing arms, whose businesses should be restructured, Xinhua said on Thursday, citing Lou.

China’s local governments have 1.86 trillion yuan of debt that matures in 2015, as well as an additional 919.3 billion yuan in contingent liabilities, according to a government audit report based on data as of June 2013.

“This move will add supply in the bond market, and may cause the yield to increase,” Merchant Bank’s Liu said. “The PBOC needs to continue to cut reserve-requirement ratio or supply cash in targeted ways.”

— With assistance by Tian Chen

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