CHINA will allow regional authorities to convert some high-yielding debt into municipal bonds in a bid to cut financing costs on liabilities.

    The government will permit as much as 1 trillion yuan (US$160 billion) in the obligations to be swapped into local government notes that have lower yields, the Ministry of Finance said in a statement dated Saturday.

    That may reduce interest payments by as much as 50 billion yuan a year, allowing authorities to boost spending, it said, without specifying what kind of debts are covered.

    China is seeking to rein in local government borrowing while accelerating fiscal spending to defend a 7 percent economic growth target. The debt rose to 17.9 trillion yuan as of June 2013, the National Audit Office said.

    Debt conversion “will greatly reduce the market’s current worries over local governments’ refinancing risks,” Guotai Junan Securities Co. analysts wrote in a note yesterday. “This shows the government’s determination and intent to resolve the risks of outstanding debt.”

    The plan solves “the eyebrow burning urgency” local governments face on the issue, said Jia Kang, former head of the finance ministry’s research institute.

    A plan announced last year to stop regional authorities from borrowing through local government financing vehicles (LGFVs) has raised concern they may cut spending just as the economy expands at its slowest pace since 1990.

    Thousands of LGFVs were established to finance construction of bridges, roads and sewage works after a 1994 budget law banned provinces and cities from selling bonds directly.

    The People’s Bank of China’s two interest rate cuts in three months have failed to lower borrowing costs for many lower-rated borrowers as concern mounts that defaults may spread. The yield premium for five-year AA rated corporate debt, the most common grade for LGFVs, over sovereign notes, has jumped 15 basis points since November, when the central bank first cut rates.

    Policymakers amended the local budget law last year, stipulating all government borrowings need to be brought into the fiscal plan. While this opens the door for regional authorities to issue notes directly, the municipal debt market is still in an early stage of development. (SD-Agencies)