Local bonds no easy sell to China's banks
Given the huge debt burden at commercial banks, the PBOC may have to keep pumping cash to expand the loan swap programme
Just how much cash will the People's Bank of China need to hand out to get commercial banks into local government bonds? Some experts say it might have to finance the whole thing.
Industry watchers were surprised last month by media reports that local government bond sales in Jiangsu and Anhui provinces had been delayed due to a lack of demand.
After all, the mastermind of the one trillion yuan (HK$1.3 trillion) debt swap, the Ministry of Finance, is also the largest shareholder in many mainland banks, the dominant players in the government bond market.
The delays have led to talk of major monetary easing that would push banks into the debt-for-bond swap, a plan that it is hoped would reduce the credit risks surrounding opaque, unbridled local government borrowing since 2008.
It is also a clear sign that mainland banks are becoming more sensitive to the market - perhaps sooner than the Ministry of Finance would have liked - and requiring better conditions as their profits slow and balance sheets come under pressure.
On the surface, an opportunity to swap loans for bonds should be attractive to banks. The programme, announced by the ministry in March, would essentially allow banks to shift the asset class of debt from loans to bonds, which carry a lower risk weighting and could help boost earnings.