China's local gov't debt swap 'not QE'

China's local government debt swap is positive for the real economy but "not QE" by the central bank, Bank of America Merrill Lynch said in a research note on Thursday.

Jiangsu, an eastern province, will be the first to auction local government bonds this year. The bonds are expected to be worth 52.2 billion yuan (8.3 billion U.S. dollars), with 30.8 billion yuan set to pay debts that are due this year.

New rules by central authorities allowing private placement in the debt swap could help lower the debt burden on local governments, help private sector funding needs and lower overall funding costs in the economy, according to the research.

Alleviating funding pressure on local governments could support infrastructure investment and stabilize growth, Bank of America Merrill Lynch said.

Contrary to the characterization of the debt swap as a Chinese version of the quantitative easing, Bank of America Merrill Lynch said this is not QE by the People's Bank of China, as the central bank will not purchase those local government bonds.

Moreover, there is no indication that the central bank would announce a specific relending program to match the size of the local government debt swap, Bank of America Merrill Lynch said.