Local government debt to be swapped

China plans to further transfer 1.73 trillion yuan ($270.8 billion) of existing less-transparent local government debt into bonds by August to strengthen debt management and control potential risks, the Ministry of Finance said on Thursday after reporting financial revenue in 2017 that was higher than expected.

The country’s local government debt-swap program, which started in 2015, has shifted 10.9 trillion yuan of debt into bonds trading on the public market.

“The program is expected to end by August,” Wang Kebing, deputy head of the ministry’s budget department, said at a news briefing.

Last year, bonds issued under the swap program totaled 2.77 trillion yuan, down by 2.11 trillion yuan from 2016, according to the Ministry of Finance.

In order to crack down on fast-growing local debt and prevent the risk of default, borrowing from local government financing vehicles — companies capitalized and owned by local governments to raise money for municipal infrastructure construction — has been forbidden since 2014 due to their high level of debt.

The financing vehicles were replaced by local government bond financing at the time.

In 2017, local governments issued 4.36 trillion in yuan bonds, 1.69 trillion yuan less than in 2016, official data show. The total local government debt balance stood at 16.47 trillion yuan by December, below the government targeted ceiling of 18.82 trillion yuan.

The Ministry of Finance pledged to facilitate reform of local government bond financing this year, especially through insurance of the Chinese version of municipal bonds, or the so-call local government special bond, to ensure sufficient funds for key investment projects while taming illegal fundraising activities.

Qiao Baoyun, head of the Academy of Public Finance and Public Policy at the Central University of Finance and Economics, said that issuing this new type of bond is seen as a measure to curb the country’s “invisible” local debt growth, which is one of the most risky sectors.