No ‘zom­bies’ al­lowed in new debt rules

China Daily (USA) - - FRONT PAGE - By WANG YANFEI in Bei­jing wangyan­fei@chi­

Debt-to-eq­uity swap pro­grams to lower China’s cor­po­rate debt will not of­fer a free lunch to profit-los­ing com­pa­nies, ac­cord­ing to guide­lines is­sued by the State Coun­cil on Mon­day.

Un­like the pre­vi­ous gov­ern­men­tled eq­uity-for-debt pro­gram launched at the end of the 1990s, the new guide­lines re­quire that the pro­gram will be launched un­der mar­ket prin­ci­ples.

The gov­ern­ment will play a com­ple­men­tary role only, the guide­lines said. It will not be re­spon­si­ble for choos­ing which com­pa­nies are qual­i­fied for the pro­gram and won’t bear the losses dur­ing the swap process.

“The pro­gram is open only to promis­ing com­pa­nies with short-term dif­fi­cul­ties,” said Lian Weil­iang, deputy head of the Na­tional De­vel­op­ment and Re­form Com­mis­sion. “Loss-mak­ing zom­bie com­pa­nies will be strictly banned.”

In the mean­time, fis­cal poli­cies and pref­er­en­tial poli­cies will be pro­vided to sup­port debt-to-eq­uity swap pro­grams in the fu­ture, ac­cord­ing to Dai Bo­hua, as­sis­tant fi­nance min­is­ter.

Fan Yifei, a vice-gov­er­nor of the Peo­ple’s Bank of China, said the cen­tral bank will cre­ate a fa­vor­able mone­tary pol­icy en­vi­ron­ment and en­sure that credit growth re­mains at a proper level to im­ple­ment the delever­ag­ing process.

The top level guide­lines come at a time when ris­ing cor­po­rate debt in China is pos­ing in­creas­ing risks to the fi­nan­cial sec­tor, ac­cord­ing to Lian.

Cor­po­rate debt rel­a­tive to GDP

Re­spon­sive mea­sures to pre­vent losses are needed.”

Wang Zhaox­ing, as­sis­tant chair­man of the China Bank­ing Reg­u­la­tory Com­mis­sion, on debt-to-eq­uity swap pro­grams

reached 156 per­cent, ac­cord­ing to the Na­tional In­sti­tute for Fi­nance and De­vel­op­ment, and a large pro­por­tion comes from profit-los­ing State-owned en­ter­prises.

“Although the bank­ing sec­tor does face a cer­tain level of pres­sure brought by bank­ruptcy and re­struc­tur­ing, debt-to-eq­uity swaps will not lead to a sys­temic cri­sis,” said Wang Zhaox­ing, as­sis­tant chair­man of the China Bank­ing Reg­u­la­tory Com­mis­sion.

“Re­spon­sive mea­sures to pre­vent losses are needed,” said Wang.

“Debt-to-eq­uity swap pro­grams will be con­ducted step by step, and will be con­ducted first in some pi­lot re­gions.”

Zhang Minghe, deputy head of the credit divi­sion with China Con­struc­tion Bank, said that de­spite mar­ket prin­ci­ples help­ing to pre­vent sim­ply shift­ing risks by con­vert­ing bad debt into bad eq­uity, more de­tailed plans must guide the debt-to-eq­uity swap process.

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