(Yicai) Aug 4 -- The swap scheme for hidden local government debts that China’s central government will likely introduce may not solve the problem, according to financial experts.

Hidden debts are those taken on by local governments through their investment and financing vehicles. Because the borrowing process is not very transparent, these debts are a major risk for local authorities.

China’s hidden debt balance reached CNY59 trillion (USD8.2 trillion) at the end of last year, with an annual interest cost of about CNY3 trillion (USD420 billion), according to data from UBS.

At its meeting on July 24, the Political Bureau of the Central Committee of the Communist Party of China, the country’s top leadership body, called for the effective prevention and resolution of local government debt risks and the development and implementation of a comprehensive debt reduction plan.

Afterward, analysts told Yicai that the new package of solutions may include swapping out the hidden debts of local governments to help extend their repayment period and lower their interest payments.

Zhou Guannan, chief analyst of fixed income at Huachuang Securities, believes that the package may be mainly based on the issuance of special refinancing bonds to replace hidden debt, supplemented by loan rollovers and interest rate cuts.

The debt limit available now for swap is relatively small, so large-scale replacement is not feasible, said Zhu Yi, co-director of Fitch Ratings’ Asia-Pacific Ratings. And according to some other experts, even without considering the debt limit, large-scale swaps will lead to more dangers for the central government.

The issuance of special refinancing bonds is expected to restart in the second half of this year or in 2024, but because it will use the quota for local government debt, provincial governments are expected to judge the bonds depending on the situation, said Sun Hao, senior director of Fitch Ratings’ Asia-Pacific Ratings.

Hidden debt should be swapped by issuing special government bonds, or local governments should be given higher quotas for refinancing bonds, suggested Li Xunlei, chief economist at Zhongtai Securities.

It is difficult to solve the hidden debt problem by using only special refinancing bonds, said Ming Ming, chief economist at Citic Securities. Doing so, however, could send a signal from the central government to maintain stability, Ming added.

Meanwhile, Wang Tao, chief China economist at UBS, believes that bank loan rollover is the most feasible and mainstream solution for lowering the debt.

But according to some bond analysts, this may put a huge strain on local financial resources, while regional small- and mid-sized banks have limited capability. Moreover, banks could also set strict standards for their own safety and efficiency considerations, making it difficult to achieve the desired effect.

As the demand for financing has increased, some experts believe it is imperative to reduce the interest rate on urban investment financing in the short term and promote the structural reform of central and local finances in the long run.

Editor: Futura Costaglione