Banks, financial system 'could experience pressures'
China's debt-for-equity swap program, which emphasizes market forces, may potentially put pressure on banks' balance sheets and the financial system, experts noted Monday.
The State Council, China's cabinet, issued a guideline on Monday on debt-for-equity swap programs, which will give lenders shares in some companies. It is part of a bid to help loss-ridden domestic companies to deleverage.
China has pledged an "orderly" debt-to-equity swap process, according to the guideline posted on the State Council's official website on Monday.
But the reform is not a "free lunch" for troubled companies, as the market will play a decisive role during the process and only the fittest will survive, Lian Weiliang, deputy head of the National Development and Reform Commission, told a press briefing. He noted that this reform is different from the policy-led swap program in the 1990s.
Four types of enterprises, including "zombie companies" that have been losing money for a long time and stand no chance of making a profit, enterprises that have a record of evading debts maliciously, companies whose liability relationships are unclear and complex, as well as those that will potentially cause excess capacity and inventories, have been excluded from the list of companies that are eligible for such swaps, said the guideline.
The value of equity stakes and the assignment of debt liabilities will also be handled through the market mechanism, and the government won't force State-owned enterprises (SOEs) or banks to participate in the program or take responsibility for any losses, the guideline noted. The market units themselves must bear the risks as well as reap the benefits, it said.
The plan also bans banks from directly swapping nonperforming loans, with conversion to be handled by asset management institutions and State investment firms.
The government will offer tax breaks to help companies seeking to make debt-equity swaps, Assistant Finance Minister Dai Bohua told the press briefing.
"The plan is part of the government's effort to push forward supply-side reform, with the aim of tackling rising corporate leverage and bad loans," Wang Danqing, a partner at Beijing-based consultancy ACG, told the Global Times on Monday.
The swap program will help troubled SOEs that are fundamentally healthy to "slim down, increase efficiency and maintain sound development," Meng Jianmin, vice chairman of the State-owned Assets Supervision and Administration Commission of the State Council, told the press briefing.
Some domestic companies, especially SOEs, have been burdened with excessive debt in recent years. Chinese companies have $18 trillion in debt, equivalent to about 169 percent of the country's GDP, Reuters reported on Monday.
Difficulties remain, however, industry players noted.
One of the problems is the "slowing growth of stock credit and social finance" associated with the increase in equity financing, which might curb the financing demand from the real economy, Wang said.
But this can also be regarded as the optimization of the social financing structure, Ma Wenfeng, a senior analyst at Beijing Orient Agribusiness Consultant, told the Global Times on Monday.
As the reform process continues, dealing with the increase in zombie companies' bankruptcies in the following months will also be a problem, as those companies do not meet the requirements for the swap program, noted Wang.
Commercial banks are dealing with debt of 23 billion yuan ($3.43 billion) associated with bankrupt zombie companies, according to the State Council.
"This problem is inevitable during the debt restructuring process, and enterprises should have prepared for certain losses," Ma said.
Dongbei Special Steel, an SOE that has defaulted on its debt, formally began a bankruptcy restructuring process on Monday, the Xinhua News Agency reported.
