More funding urged for deleveraging
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.