More fund­ing urged for delever­ag­ing

China Daily European Weekly - - BUSINESS -

Reg­u­la­tors will take added steps to over­come ob­sta­cles ham­per­ing debt-re­duc­tion pro­grams

lower debt bur­dens of en­ter­prises by con­vert­ing cor­po­rate debt into eq­ui­ties to be owned by en­ti­ties es­tab­lished by the na­tion’s ma­jor banks and pri­vate cap­i­tal.

Debt-to-eq­uity swaps in­volve trans­ac­tions in which a com­pany’s obli­ga­tions or debts are ex­changed for eq­uity, gen­er­ally mean­ing shares in the case of a listed com­pany.

Through the pro­grams, debt-bur­dened com­pa­nies will have their debt lev­els re­duced, while banks can im­prove their as­set qual­ity.

“The next round of delever­ag­ing ef­forts is ex­pected to put greater em­pha­sis on curb­ing un­reg­u­lated bor­row­ing by strug­gling Sta­te­owned en­ter­prises,” the ex­pert said.

Un­like swap pro­grams launched in the 1990s, this round of pro­grams that be­gan in 2016 is more mar­ke­to­ri­ented, thanks to the up­dated reg­u­la­tory phi­los­o­phy of the au­thor­i­ties, an­a­lysts say.

That means the gov­ern­ment does not in­ter­vene in swap pro­grams, and the con­ver­sion prices should be ne­go­ti­ated by banks, debtors and im­ple­ment­ing agen­cies. In ad­di­tion, the au­thor­i­ties do not set strict time­lines or spe­cific tar­gets for im­ple­ment­ing the pro­grams, in or­der to al­low room for mar­ket­based deals.

China’s cor­po­rate debt is equiv­a­lent to 160 per­cent of the coun­try’s GDP, said Huang Qi­fan, deputy head of the Na­tional Peo­ple’s Congress Fi­nan­cial and Eco­nomic Af­fairs Com­mit­tee, in June. That means the scale of debt to be con­verted would be colos­sal even if a small pro­por­tion of the debt is in­cluded in the pro­gram.

Sub­sidiaries of cred­i­tor banks have made some prof­its in the first half of this year, in­di­cat­ing progress has been made. For in­stance, China Con­struc­tion Bank Fi­nan­cial As­set In­vest­ment Co, an agency con­duct­ing debt-to-eq­uity swaps, saw 31 mil­lion yuan in profit in the first half of this year.

Start­ing on July 5, the cen­tral bank low­ered the re­serve re­quire­ment ra­tio for com­mer­cial lenders by 0.5 per­cent­age point, free­ing up about 500 bil­lion yuan specif­i­cally ear­marked for the debt-to-eq­uity pro­gram.

The fund­ing sup­port by the cen­tral bank has helped solve fi­nan­cial short­ages on a large scale, said a man­ager with a lead­ing im­ple­ment­ing agency un­der a com­mer­cial bank, who de­clined to be iden­ti­fied. “But more fi­nanc­ing is needed to fill the gap, con­sid­er­ing the fact that debt-laden com­pa­nies are mainly large State-owned en­ter­prises in trou­bled in­dus­tries (that serve as the back­bone of the econ­omy).”

Ac­cord­ing to the Na­tional Devel­op­ment and Re­form Com­mis­sion, a to­tal of 1.73 tril­lion yuan in swap deals were signed be­tween banks and com­pa­nies, but only around 20 per­cent had been funded.

“As many debt-to-eq­uity swaps are high-yield, high-risk in­vest­ments, in­de­pen­dent mar­ket play­ers might lack in­cen­tives,” says David Yin, an an­a­lyst with Moody’s In­vestors Ser­vice, adding that a clear exit pro­gram and more fi­nan­cial sup­port are needed to fa­cil­i­tate the pro­grams.

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