China to al­low com­mer­cial banks to swap bad debt for equity stakes

The Pak Banker - - COMPANIES/BOSS -

China's cen­tral bank is pre­par­ing reg­u­la­tions that would al­low com­mer­cial lenders to swap non-per­form­ing loans of com­pa­nies for stakes in those firms, two peo­ple with di­rect knowl­edge of the new pol­icy told me­dia.

The sources, who spoke on con­di­tion of anonymity, said the re­lease of a new doc­u­ment ex­plain­ing the reg­u­la­tory change was im­mi­nent. The Peo­ple's Bank of China (PBOC) did not im­me­di­ately re­spond to re­quests for com­ment.

Non-per­form­ing loans (NPLs) surged last year as China's econ­omy grew at its slow­est pace in a quar­ter of a cen­tury.

Of­fi­cial data from the China Bank­ing Reg­u­la­tory Com­mis­sion showed banks held NPLs and "spe­cial men­tion" loans, or debts that could po­ten­tially turn sour, in ex­cess of 4 tril­lion yuan ($614 bil­lion) at the end of last year.

The new reg­u­la­tions would re­duce NPL ra­tios at com­mer­cial banks, re­quir­ing them to set aside less cash to cover losses in­curred by bad loans. Funds could then be freed up for fresh lend­ing for in­vest­ment in a new wave of in­fra­struc­ture prod­ucts and fac­tory up­grades that the govern­ment hopes will re­ju­ve­nate the econ­omy.

"Such a rule change shows banks' bad loans have risen to such a level that this is­sue has to be tack­led now be­fore it's too late," said Wu Kan, Shang­hai-based head of equity trad­ing at in­vest­ment firm Shan­shan Fi­nance.

State banks have ex­tended a lot of loans to govern­ment fi­nanc­ing ve­hi­cles and to state-owned coal and steel pro­duc­ers, so this pol­icy can help give lenders time to deal with their non-per­form­ing as­sets as China pushes sup­ply-side re­forms, Wu added.

The qual­ity of as­sets held by banks is worse than it looks, an­a­lysts have said. To avoid stump­ing up cap­i­tal and to pro­tect their bal­ance sheets, some Chi­nese banks have un­der­re­ported bad loans and un­der­recog­nised over­due debt, they say.

The top bank­ing reg­u­la­tor has warned com­mer­cial lenders to pay spe­cial at­ten­tion to risks. China's bank shares fell more than 2 per cent on Thurs­day, with In­dus­trial and Com­mer­cial Bank of China down 2 per cent and Bank of Com­mu­ni­ca­tions los­ing 2.7 per cent.

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