[SHANGHAI] China will let local governments convert up to 1 trillion yuan (S$220.7 billion) in debt to lower interest bonds as it seeks ways to ease their massive debt burden without crippling the broader economy.
Beijing is struggling to rein in local government debt, estimated around US$3 trillion. Local governments rushed to finance infrastructure and real estate projects, especially after the 2008/09 global financial crisis, in efforts to stimulate economic growth.
The Ministry of Finance said in a statement on Sunday that local governments will be permitted to convert a portion of their maturing high-interest debt into lower interest municipal or provincial bonds.
Bond prices reacted strongly to the news, with interbank benchmarks rising sharply. Treasury futures for June delivery were down by as much as 0.59 per cent on Monday, the largest intraday move in three months. "Interest rates for government debt are usually lower, and this procedure will lower the local government debt burden by around four to five hundered million yuan a year," the ministry said. "This will help relieve some of the pressure local government finances, and also provide some of the capital for other expenditures." Local government finances have been strained over the past year as the non-bank financing plaforms they have relied upon to plug holes in their budgets have become a target of regulators concerned with surging local government debt.
In December 2014, Chinese regulators banned the use of debt with a rating of below AAA in short-term repurchase agreements, used by financial institutions to cover temporary funding short-falls. Many local government financing vehicles (LGFVs) have ratings of AA, essentially locking them out of the short-term financing market.
On Saturday, the governor of Shandong province told reporters that the cash-strapped province might need to sell assets to pay off high interest debt.
The Ministry of Finance's statement will ease concerns over the impact of the crackdown on local governments' ability to spend in the midst of a deepening slowdown in China's growth.
Rising issuance of government debt may, however, push up financing costs for other non-official borrowers.