China Pumps Up the Local Government Debt Swap

Bloomberg: 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.

...“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.”
Yuan negative at the moment.

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