A clerk counts yuan bills at a bank in Huaibei, East China's Anhui province. [Photo/IC]

China is set to boost local debt swap by admitting municipal bonds as collateral for borrowing. Under the new rule, banks can pledge municipal bonds as collaterals in the central bank's repurchase agreement operations and other liquidity support tools such as standing lending facility (SLF), medium-term lending facility (MLF) and pledged supplementary lending (PSL), reported Sina citing an inside document.

Municipal bonds will also be considered as eligible collaterals for liquidity management in central treasury and local treasury of pilot regions, according to the news.

The Finance Ministry in March announced a 1 trillion yuan ($164 billion) debt-for-bonds swap plan that would save local governments up to 50 billion yuan in interest payments a year.

The new collateral rule will improve the willingness for banks to take on municipal bonds, which are usually less liquid than treasury bonds and its yield incentives are limited, said Li Qilin, macro researcher with Minsheng Securities, in a note.

Jiangsu province delayed a 64.8 billion yuan bond issuance on April 23 after failing to agree with banks on the issuance price.

The move cannot be regarded as quantitative easing, as long as local debts are not directly purchased by the central bank and only serve as collateral to gain liquidity, said Li.

China plans to complete the first batch of the swap worth 1 trillion yuan by the end of August, according to Xinhua.

The National Audit Office said that local government debt stood at around 10.9 trillion yuan by the end of June 2013. A total of 1.86 trillion yuan is due by the end of this year.

Since China launched a pilot program lifting local bond issuance among 10 provincial-level governments in May last year, 109.2 billion yuan municipal bonds were issued in 2014.