China’s loans shrink on a successful bond swapping program

China’s loans shrank significantly in April, compared to that in March on an unsuccessful program adopted by the government to swap local government debt for cheaper municipal bonds. No less than RMB 350 billion of such bonds were issued last month, according to the People’s Bank of China.

However, local government bond issuances are neither included in loans nor total social financing (TSF). Therefore, these two measures do not fully reflect China’s credit buildup. China’s total debt was 247 pct of GDP in 2015, up from 164 pct in 2008.

According to estimates, if municipal bond sales were included, (newly increased) TSF would have jumped 17 pct y/y in April, compared to the official TSF reading, which fell 29 pct, DBS reported.

"It is expected that such patterns would recur for the remainder of the year as the government expands its debt swap program," DBS commented in a research note.

Meanwhile, Finance Minister Lou, Jiwei believes that around RMB 5 trillion of high-cost local government borrowings will mature in 2016 and need to be refinanced through these swaps.