"Given that there is 20 trillion yuan of 'legacy debt' and that must be repaid in five years, granting a 1 trillion yuan swap quota is reasonable," said Gao Qunshan, chief analyst in the fixed-income department of Fuzhou-based Industrial Securities.

What brokerages are focusing on is how the 1 trillion yuan in new notes are issued. The Ministry of Finance statement did not say whether that would take place under the pilot municipal bond program or through issues of special-purpose treasury debt.

An official of the China Banking Regulatory Commission warned that local government debt risk is the country's top financial and fiscal risk, and he urged broader disclosure of debt data.

Liao Min, director of the CBRC's office in Shanghai, said: "There is very limited information in the budget report about how the principal and interest (of local government debt) will be repaid. Disclosure of this information is critical as it helps us evaluate risk, shapes public expectations and encourages private capital to help mitigate the risk."

Bond swaps are just a temporary measure to reduce the interest payment burden. How revenue generated from local governments' projects can cover debt servicing remains unclear, he said.