China's local government takes on debt restructuring plan

The Finance Minister Lou Jiwei's press conference at the National People's Congress meeting provided important clues on how the stock of local government debt will be restructured. 

One element of the plan under consideration is to swap existing off -budget debt (bank loans, corporate bonds or shadow banking credit) into local government bonds.
 
The first tranche is approved at CNY1tn, which, by our estimate, is still less than the amount to be refinanced in 2015. 

Societe Generale notes in a report on Monday:

• This is a sensible step and will mitigate the liquidity risk faced by local governments in the near term, thus a positive development.
• There are many questions to be answered still and we see two as most critical: 1) the debt restructuring should be conditional on stricter discipline in new borrowing, which is a key determinant of infrastructure investment growth going forward; and 2) the scope and the size of the restructuring program should be well defined, which would lead to further risk differentiation in the financial system.