An employee counts yuan banknotes at a bank in Huaibei, Anhui province June 22, 2010.[Photo/Agencies]

The central government has ordered a swap plan amounting to 1 trillion yuan ($160 billion) of low-yield municipal notes that will replace legacy liabilities, a move intended to ease local governments' mounting interest repayment pressure.

In a statement on its website on Monday, the Ministry of Finance confirmed the swap plan. Domestic media reports had speculated that the plan would be for 3 trillion yuan.

The swap plan is an obvious attempt to cut local governments' financing costs on total liabilities, which brokerages estimate exceed the equivalent of $3 trillion.

The Ministry of Finance said in the statement that the action could reduce interest payments by 40 billion yuan to 50 billion yuan a year, giving local authorities room to boost other spending.

"The risk of repaying matured obligations can be significantly reduced, which is good for market sentiment," said Zhang Li, an analyst with Shanghai-based Guotai Junan Securities Co.

China is seeking to rein in borrowing by local governments as it accelerates fiscal spending to defend a 7 percent economic growth target. Local governments' debt stood at 17.9 trillion yuan as of June 2013, according to data from the National Audit Office.

Estimates of their liabilities at present vary from 20 trillion yuan to 25 trillion yuan.

Moody's Investors Service estimated that 2.8 trillion yuan in local debt falls due this year.

In a separate report, Industrial Securities Co Ltd said that interest payments alone account for 53 percent of China's annual total social financing, the broadest measure of credit.

Local authorities set up tens of thousands of funding units, known as local government financing vehicles, to finance projects from sewage systems to subways after a 1994 budget law barred them from issuing notes directly. This debt typically features a short maturity and a high interest rate.