Chinese policy makers are considering plans to as much as double the size of the clean-up program for shaky local government finances, according to people familiar with the discussions.
In what would be the second stage of the program, 500 billion yuan ($81 billion) to 1 trillion yuan of local-government loans would be authorized to be swapped into bonds issued by provinces and cities, the people said, asking not to be named because the talks are private. The first stage of the bond swap, currently under way, is 1 trillion yuan.
An expansion would signal officials are confident in the template they’ve crafted for reducing the risks of a record surge in borrowing that local authorities took on in recent years, funding a glut of investment projects. The complex process includes inducements for banks to buy new, longer-maturity, lower-rate bonds.
“The initial success of the first batches of bonds, especially the lower-than-expected yields, may have encouraged the Finance Ministry to expand the swap,” said Ding Shuang, chief China economist at Standard Chartered Plc in Hong Kong. “Additional swaps, if confirmed, can show China’s handling of the local government debt problem will be faster than previous expectations.”
Approval Pending
The up-sized plan needs State Council approval, according to the people. The Finance ministry didn’t immediately respond to a faxed request for comment. Finance Minister Lou Jiwei had previously said that the swap program could be expanded.
Chinese stocks extended gains after the news, with the Shanghai Composite Index up 1.9 percent as of 10:30 a.m. local time. By contrast, the MSCI Asia Pacific Index was down 0.5 percent.
By reducing debt-servicing costs for local authorities, policy makers are helping them sustain spending that’s crucial to shoring up China’s economic growth. A gauge of manufacturing today suggested that the fiscal loosening, along with monetary easing by the central bank, has helped arrest a deterioration.
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