China has a plan to lower borrowing costs, and ratings agency Fitch is a fan of the idea. According to a statement released by the agency this morning, the Chinese governments plan to allow local governments to convert their debt into municipal and provincial bonds which pay a lower interest rate will mitigate the immediate risks owing to debt burdens of local actors. Fitch says the deal will lower the borrowing costs for local government and be a net positive for the countrys debt situation as a whole.

If the refinancing effort is accepted by the markets, and the Fitch analysts are confident of that outcome, it would mean a substantially lower overall cost of borrowing for the agencies that benefit, giving the central Chinese government more room to breathe as it attempts to solve the countrys long-running debt crisis.

Fitch looks positively at China

With the debt situation in China becoming increasingly difficult to comprehend and activity in the worlds second biggest economy apparently slowing down. the worlds eyes are firmly upon the financial situation of local governments inside the country. If they fail to meet obligations, the economic ramifications could drive international events for a significant period.

According to a press release from the agency the bond-swap scheme reduces immediate risks around the refinancing of the debt falling due in 2015, the impact on longer-term sustainability remains to be addressed. The ratings agency seems hopeful that the measures will increase the transparency of debt in China, and increase the amount of control that the central government has over such matters.

China searches for solutions

The Chinese government has, like hundreds of financial analysts. been perfectly aware of the problems with local government debt for years, and its been doing its best to solve the problem on a gradual basis. The countrys leaders are trying not to inflame a panic while at the same time winding down the amount of debt held in a responsible manner.

Fitch says that todays announcement reduces immediate risks around the refinancing of the debt falling due in 2015, but it does little to answer questions of the economys long term stability or sustainability. The close the back door, open the front door approach taken by the Chinese government has many proponents, but it may not be quick or potent enough to solve the debt crunch before something exogenous sends the countrys investors spinning.

China debt burden weighs heavily

The world at large is concerned about the amount of debt in China because of the serious ramifications a credit crisis in the country could have across the globe. With the countrys local governments involved in the kind of dodgy financial rough-housing thats almost entirely opaque, the actual mechanics of such a crisis are mostly fodder for hedge funds shorting the countrys stock market .

Local government financing vehicles have been used by regional authorities in order to take on debt, despite not technically being allowed to do so. The government only recently allowed the use of municipal bonds, but it did so in a limited manner. Fitch expects it to expand the muni market beyond the initial 20 cities sometime soon, allowing more agencies to take advantage of this debt-swap deal.