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October 11, 2016

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Plan to tame rising corporate debt

CHINA is encouraging debt-for-equity swaps to help companies ease their debt burden and reduce bad loans at commercial banks.

Financial institutions such as asset-management companies and state-owned investment firms are encouraged to purchase non-performing loans from banks and swap them into equities in indebted companies, according to guidelines released yesterday by the State Council, China’s Cabinet.

Banks are prevented from directly swapping debt into equities but are allowed to handle conversions via their relevant subsidiaries or other banks’ subsidiaries, according to the guidelines.

Swapping is one way to cut corporate leverage, improve commercial banks’ balance sheet and free up cash for fresh lending for investment.

But the government reiterated that there would be no free lunch for troubled firms.

According to the guidelines, companies with good prospects and a feasible reform plan, companies with technology and capability in line with national industrial development strategy, and entities with good credit record will be able to exchange their debt for equities.

The guidelines mark the government effort to address surging debt, one of China’s biggest challenges.

China’s debt-to-GDP ratio has soared to 250 percent last year, with corporate debt taking up 145 percent of GDP, according to International Monetary Fund’s annual review of China in August.

Seeking to assure concerns that some companies may use the swap as “free lunch” to escape liability, Lian Weiliang, vice director of the National Development and Reform Commission, said yesterday that this new round of debt-for-equity swap will be legal-based and market-oriented in order to avoid moral hazard.

“The government won’t intervene in swaps, every link of swaps including pricing and fundraising should be market-based, and the reform plan of indebted companies should be strictly implanted to ensure shareholders rights,” Lian said at a media briefing.

Wang Zhaoxing, vice chairman of the China Banking Regulatory Commission, said at the briefing that “zombie firms” on the verge of bankruptcy will be forbidden from conducting debt-to-equity swaps. “We encourage companies to strike for success, but counter measures should be prepared in case of potential losses,” Wang said.


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