China's bond market will see another 2 trillion yuan ($312.5 billion) of bonds issued by local governments this year, testing the market's readiness over massive low-yield bond supply.

According to a statement issued by the Finance Ministry on Thursday, the top legislature has approved a 6 billion yuan new issuance quota, and a 3.2 trillion yuan quota to swap high-yielding legacy debt with new low-cost bonds to alleviate local government repayment pressures. Various regions this year so far have already sold 1.86 trillion yuan of bonds, which mean they could sell near 2 trillion yuan of bonds in the remainder of this year.

China in March, and then in June granted a 2 trillion yuan debt-for-bond swap quota. The market expected another 1 trillion yuan quota because the 2 trillion quota was not big enough to cover all the maturing debt this year.

But the 3.8 trillion yuan quota - or nearly 500 billion yuan bond sale in each following months - is a bit more than market expectations.

"The quota is a relief for local governments because that means they would not have any problem in repaying the due debt, and they could use their own fiscal income to back up new infrastructure construction," said Li Qilin, a fixed income analyst with Minsheng Securities Co Ltd.

According to Li, the higher-than-expected debt swap quota also indicated that the outstanding debt by the end of 2014 is higher than previous estimates, which was believed to swell from 10.9 trillion yuan in mid-2013 to 16 trillion yuan by the end of 2014. The government has not yet released the long-awaited figure.

Local governments last year were ordered to report and classify their debts (as of end-2014) by Jan 5 into two categories: Those that were to be included in their fiscal budgets and those that financing vehicles were to resolve on their own. The figure has not yet been released. Li said this might be because Beijing thinks local government's reported debt is too high and there are continuous back-and-forth negotiations.

For banks that have to buy the massive debts, their aversion to the bonds, usually yielding less than 4 percent, has already been demonstrated by rising coupon in local governments bond auctions. Further supply would be a dampener to the market.

Zhang Yingjie, general manager of the research branch of China Chengxin International Credit Rating Co, said concerns over supply pressure might be one of the reasons why the central bank cut interest rates recently. It should do more in the future to rein in potential interest rate hikes.