Companies may have trouble restructuring
The nation is expected to launch a new round of debt-for-equity swaps to avoid bad loans bringing more trouble to the economy, but experts said on Tuesday the program faces more difficulties and challenges compared with previous eras.
"The Chinese economy has grown dramatically, as have outstanding loans, during recent decades, so that it's much more difficult to deal with such a large volume of bad loans," Wang Ying, senior director of corporate ratings at Fitch Ratings, told the Global Times on Tuesday.
Many companies, especially those with overcapacity, will have difficulties in laying off employees during the debt restructuring, said Wang.
Although the country is expected to face more difficulties, the debt-for-equity swaps can still help banks reduce the pressure of bad loans, as well as help companies ease the pressure of heavy debts, noted Wang.
Premier Li Keqiang said at an economic meeting on Monday that debt-for-equity swap programs can be a way to reduce corporate leverage gradually, the Xinhua News Agency reported on Monday.
Such swaps are not new in China. Early in 1999, 580 companies swapped more than 400 billion yuan ($61.9 billion at current exchange rates) of bad loans for equity, accounting for nearly 30 percent of the total bad loans at the time, according to a report by Beijing-based financial newspaper Securities Daily on April 6.
Under the debt-for-equity swap programs, Chinese commercial banks can swap the debt they hold in underperforming companies for stock holdings.
"The current banking law still needs to be revised if the country plans to adopt the programs," Wu Hong, director of the School of Economic Law at the East China University of Political Science and Law, told the Global Times on Tuesday.
Currently, Chinese commercial banks are not allowed to invest in non-banking companies.
"The specific details of the programs have not come out yet," said Wu.
At the end of 2015, Chinese banks' total bad loans stood at 1.27 trillion yuan ($200 billion), according to the China Banking Regulatory Commission. At the end of 2015, the bad loan ratio of China's commercial banks rose to 1.67 percent from 1.59 percent as of the end of September 2015. And banks' increasing bad loans led to decreasing profits.
China faces an inevitable structural adjustment that will last for years, and it may see growth well below the 6.5 percent to 7 percent that many expect by the end of the decade, Andrew Fennell, director of sovereign ratings, Fitch Ratings, said at a conference held by the rating agency in Shanghai on Tuesday.
