The local government debt swap is starting to have an impact on the flow of financing in China that has been widely overlooked and that should support the economy. Local governments have begun to issue bonds in recent weeks to refinance the loans of local government financing vehicles. This shift away from bank loans has created space for others to borrow – because policymakers impose quantitative limits on the amount banks can lend – while ensuring that local government financing needs continue to be met. In May, as the scheme got off the ground, local governments issued RMB134bn in bonds. Already in June, they have issued over RMB400bn, making the debt swap a significant source of new credit.
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