Debt swap covers 54% of repayments

More than half of the high-interest local government debt that falls due this year will be covered under a debt swap plan arranged by the Ministry of Finance, which said on Friday that the swap would not raise the debt level further.

The ministry on Monday disclosed that it had ordered issues of 1 trillion yuan ($160 billion) of low-yield municipal notes that will replace legacy liabilities, in a bid to ease local governments' mounting interest repayment pressure.

An audit in June 2013 found local governments faced repayments of 1.858 trillion yuan in 2015. The debt swap covers 53.8 percent of that amount, and the conversion could reduce interest payments by 40 billion yuan to 50 billion yuan a year, according to the ministry.

Following the debt swap announcement, there was speculation on Wednesday that the plan would expand to 10 trillion yuan, which would be tantamount to "quantitative easing". Vice-Finance Minister Zhu Guangyao denied this would be the case, but did not elaborate.

The latest statement from the ministry said the debt swap only covers funds borrowed before June 2013. Provinces and municipalities, instead of the ministry, will be primarily responsible for issuing and repaying the new debt.

The debt swap represents "a change of form" and "not a rise of outstanding debt", so it will not add to this year's deficit, the ministry noted.

According to the Economic Information Daily, which is affiliated with the official Xinhua News Agency, the 1 trillion yuan quota has been distributed among the provinces' finance bureaus.

The quota for each region was set in reference to its legacy debt and maturing debt. Jiangsu province got the largest share of more than 80 billion yuan, while Guangdong province got more than 50 billion yuan.

Tens of thousands of local government financing vehicles in the past few years amassed huge debts through bank loans, trusts or the public bond market. Some 2.8 trillion yuan in debt, which includes indirect liability, falls due this year. Of this, 558.7 billion yuan is LGFV bonds.

"At least the short-term liquidity stress and default risk are much reduced," said Nicholas Zhu, a senior analyst covering sub-sovereign debt at Moody's Investors Service in Beijing.

But Qu Qing, an analyst at Huachuang Securities, pointed out that the majority of the legacy debt was incurred as bank loans.

Thus, the debt swap means that a smaller share of LGFV bonds coming due this year will be swapped. He estimated the proportion at about 20 percent.

Zhu said that this year's budget has recognized the financing needs of unfinished projects.

"The new budget allows refinancing of projects under construction through bank loans before the transition to a fully fledged local government bond market is complete," he said.