China Said to Peg Local Debt Swap Program at 15 Trillion Yuan

China plans to expand the size of its program for addressing high-cost local government debt to about 15 trillion yuan, Finance Minister Lou Jiwei told a closed-door meeting last month, according to a person who attended the gathering.

The initiative to swap high-yielding local debt into cheaper municipal bonds is set to run through the end of 2017, Lou said, according to the person, who asked not to be identified because the remarks weren’t public. Officials were previously reported to have approved about 4 trillion yuan for this year.

Expanding the effort would help buttress the finances of local governments that are key to implementing infrastructure projects needed to fulfill the leadership’s goals for economic growth. The total cited through 2017 would cover more than half of the 24 trillion yuan of debt local authorities had accumulated as of the end of 2014, according to state news agency Xinhua.

"This is another effort to stabilize economic expansion," said Zheng Lingyi, a Beijing-based bond analyst at China Securities Co. The plan would indicate that local government finances are "under heavy pressure," Zheng also said.

Caixin magazine reported Tuesday that Lou’s finance ministry plans to exchange 14.7 trillion yuan of local government debt over three years. The finance ministry didn’t immediately respond Wednesday to a faxed request for comment.

When the finance ministry unveiled the debt-swap program in March, it said local governments would be allowed to swap as much as 1 trillion yuan of debt. That quota has since been expanded several times, and the government planned to raise it to as much as 4 trillion yuan for 2015 alone, people familiar with the matter said last month. In August, Lou said the debt-swap program would take about three years to complete.

"While the increased supply of local government bonds will add pressure on bond yields, this would also help alleviate the debt burden for the local governments," Zhou Hao, a senior economist at Commerzbank AG in Singapore, wrote of the Caixin report. "For local governments, the fiscal revenue will be still under pressure in the coming year."

Of local governments’ 24 trillion yuan in debt, 15.4 trillion yuan is debt they have to repay, while the other 8.6 trillion yuan represents contingent liabilities, according to Xinhua.

— With assistance by Heng Xie

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