Matthews Asia: China's Loans-To-Bonds Swap Program

China's Loans-To-Bonds Swap Program by Andy Rothman, Matthews Asia

China has begun a program designed to clarify the size of its local government debt burden and reduce its financing costs. Swapping cheaper bonds for more expensive loans is an important step toward creating a healthier fiscal system. But it is equally important to understand what this program will not do. It isn’t a bailout, it won’t lead to local government defaults and it isn’t a Chinese version of quantitative easing (QE).

How the Debt Built Up

The accumulation of local government debt was the result of three policy choices made by the Communist Party. First, in the 1990s, power over local revenue collection and spending was recentralized in Beijing, in...