Aug 02, 2019 09:00 PM

China’s Local Government Debt Swaps Roll On

The provinces didn’t specify what the funds from the debt swap would be used for. Photo: IC Photo
The provinces didn’t specify what the funds from the debt swap would be used for. Photo: IC Photo

Local governments issued a total of 32.5 billion yuan ($4.69 billion) worth of swap bonds in June and July, the first sales of 2019, as the Ministry of Finance extended a program to exchange expensive local authority debt into lower-cost bonds.

China’s three-year debt swap campaign was set to end in August 2018, with local governments shedding 14.34 trillion yuan of off-the-books debt, mostly short-term and high-interest, and changing it into bonds carrying lower interest rates. But with more than 315 billion yuan of hidden borrowings remaining as of the end of 2018, Premier Li Keqiang said in March that the program would continue in order to help reduce the burden of interest payments.

Guizhou province in southwestern China was first out of the gate in June with an 11.5 billion yuan sale, followed by another 6 billion yuan issuance in July, according to filings made to the China Central Depository & Clearing Co. Ltd. (CCDC). Hunan province in Central China and Gansu in the northwest issued 9 billion yuan and 6 billion yuan of swap bonds respectively in July.

The majority of the bonds are long term, maturing in 10, 20 or even 30 years, CCDC filings show, as local authorities took advantage of a change in regulations last year that allowed them to issue longer-dated debt. Previously they could only issue short-term bonds with a maximum maturity of 10 years. Long-dated bonds are far more suitable for long-term infrastructure projects — they lower liquidity risks because local governments won't have to keep rolling over their short-term bonds that are financing long-term investment and will give issuers more certainty as regards the interest rates they pay, even if they have to pay higher rates on the long-term debt.

The provinces didn’t specify what the funds would be used for but sources told Caixin they will be mainly used to convert debt related to toll road projects after the government earlier this year promised to abolish toll booths on cross-provincial highways. Dai Dongchang, a deputy minister at the Ministry of Transport, said at a briefing in May that the ministry was preparing to push ahead with debt swaps on such projects and would allow local governments to exchange debt incurred before the end of 2014 for qualified toll road projects.

Data compiled by Guosheng Securities Co. Ltd. show that as of May 21, there were 29 local government financing vehicles focused on toll road projects in 26 provinces which had racked up debts totaling 146.9 billion yuan before the end of 2014.

Contact reporter Liu Jiefei (

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