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CHINA: China Provides Lifeline to Local Governments with Debt Swap Line

CHINA
EM BulletAPACChinaEmerging Market NewsBulletGlobalFixed Income BulletsForeign Exchange BulletsRegionMarkets
  • China announced a CNY10 trillion debt swap program to assist local governments' debt burden over a 3- and 5-year schedule.
  • Market estimates had ranged from CNY6trn to CNY10tn.
  • The Central Government will raise the local government debt ceil to CNY35tn.
  • An initial CNY6trn is available over three years and a further CNY4tn over five years.
  • The plan is aimed at helping alleviate the fiscal constraints on local governments by allowing them to refinance expensive (off balance sheet) debt at lower interest rates.   
  • The debt and accompanying interest payments have seen local governments forced into austerity measures through the cutting of services and salaries and pensions.  
  • The swap is “a major policy decision taking into consideration international and domestic development environments, the need to ensure the stable economic and fiscal operation, and the actual development situation of local governments,” Finance Minister Lan Fo’an said at a briefing (as per BBG).
  • Lan estimates the swap can save around CNY600bn in interest payments over five years, which will allow resources to boost investment and consumption. He said outstanding hidden debt was 14.3 trillion yuan as of the end of 2023 (as per BBG).
  • The facility had been well flagged leading up to this announcement over the last month.
  • President Xi has described local government debt as one of the major financial risks for China’s prosperity.
  • Local governments have traditionally relied on land sales to support the income of the region have seen that part of their fiscal position decimated given the decline in the property market.
  • Equally the growth in infrastructure projects has reached an inflection point where some regions are struggling to find suitable projects.
  • Despite what equates to an increase in in issuance going forward, the yield on the ‘on-the-run’ China 10 year declined post the news. 
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  • China announced a CNY10 trillion debt swap program to assist local governments' debt burden over a 3- and 5-year schedule.
  • Market estimates had ranged from CNY6trn to CNY10tn.
  • The Central Government will raise the local government debt ceil to CNY35tn.
  • An initial CNY6trn is available over three years and a further CNY4tn over five years.
  • The plan is aimed at helping alleviate the fiscal constraints on local governments by allowing them to refinance expensive (off balance sheet) debt at lower interest rates.   
  • The debt and accompanying interest payments have seen local governments forced into austerity measures through the cutting of services and salaries and pensions.  
  • The swap is “a major policy decision taking into consideration international and domestic development environments, the need to ensure the stable economic and fiscal operation, and the actual development situation of local governments,” Finance Minister Lan Fo’an said at a briefing (as per BBG).
  • Lan estimates the swap can save around CNY600bn in interest payments over five years, which will allow resources to boost investment and consumption. He said outstanding hidden debt was 14.3 trillion yuan as of the end of 2023 (as per BBG).
  • The facility had been well flagged leading up to this announcement over the last month.
  • President Xi has described local government debt as one of the major financial risks for China’s prosperity.
  • Local governments have traditionally relied on land sales to support the income of the region have seen that part of their fiscal position decimated given the decline in the property market.
  • Equally the growth in infrastructure projects has reached an inflection point where some regions are struggling to find suitable projects.
  • Despite what equates to an increase in in issuance going forward, the yield on the ‘on-the-run’ China 10 year declined post the news.