* China bank shares surge after rumours of bond buys by govt
* Fin min said will swap 1 trln yuan of local govt debt
* Seen as repairing bank balance sheets
SHANGHAI, March 12 (Reuters) - China stocks rose on Thursday, led by a surge in banking shares on expectations that lenders and the economy will benefit from Beijing's plans to allow local governments to swap out expensive debt, easing their massive debt burdens.
Investors may have also bought into shares in reaction to rumours that the debt swap would be far larger than the original 1 trillion yuan ($160 billion) reported.
Speculation has also swirled that the government would directly purchase bonds from local government financing vehicles (LGFVs), which would constitute a form of quantitative easing, which has come to be seen as a radical last option for central banks struggling to support their economies.
The CSI300 index rose 1.0 percent, to 3,558.85 points at the end of the morning session, while the Shanghai Composite Index gained 0.9 percent, to 3,321.32 points.
The CSI300 banking index jumped about 3 percent, as investors bet lenders would benefit from the plan to exchange local governments' high-interest maturing debt for low interest municipal or provincial bonds.
With few official details provided yet about the implementation of the debt swap, which was announced at the weekend, the market has been divided over its implications.
Some market watchers compare the move to U.S-style quantitative easing (QE) which began during the global financial crisis, while others say China's central bank is unlikely to start printing more money to fund bond sales.
China International Capital Corp said in a research report that because municipal bonds are more transparent than local government debt, and are seen as carrying a de-facto central government guarantee, the swap would allow banks holding high risk local government bonds to change them out for lower-risk assets, benefiting their balance sheets.
"Valuation of banking shares have been depressed by concerns of massive bad loans in the worst-case scenario," said Wu Kan, head of equity at Shanghai-based investment firm Shanshan Finance.
"Now with the debt swap, the risks of bad debt has been greatly reduced. Banks need to be revalued."
Regional governments are responsible for the bulk of China's public spending and have relied on borrowing heavily in recent years to stay viable, squeezing their investment spending and representing a broader systemic risk.
Reporting by Samuel Shen and Pete Sweeney; Editing by Kim Coghill