China Needs Caution as It Mulls Debt-Equity Swaps, CBRC Says

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  • State company reform may yield 1.2 trillion yuan of bad loans
  • Current law bans banks from owning stakes in non-bank firms

China needs to move cautiously before allowing the country’s banks to convert their soured loans into equity, according to the nation’s top banking regulator.

While the issue of debt-to-equity swaps is under study, it’s not as easy to execute as some media have reported, Shang Fulin, Chairman of China Banking Regulatory Commission, told reporters at the National People’s Congress in Beijing on Wednesday. The current law preventing investment in non-bank institutions is intended to protect depositors, he said, adding that regulators would need to address some technical details before proceeding.

China is drafting rules to make it easier for lenders to convert bad loans into equity stakes in debtor companies, people familiar with the matter said last week, in a move that would help authorities clean up banks’ soured credit which has climbed to the highest level in a decade.

China’s Premier Li Keqiang confirmed Wednesday that the country may use debt-to-equity swaps to cut the leverage ratio of Chinese companies, speaking during a press conference at the close of the NPC meetings.

During China’s bad-loan crisis during the 1990s, about 30 percent of the nation’s 1.4 trillion yuan ($215 million) of soured credit was resolved through debt-to-equity swaps.

State-company reforms

Plans to reform state-owned companies could lead to an additional 1.2 trillion yuan of loans turning sour, on the assumption that industrial companies cut 20 percent of their output in order to address glutted markets for their products, China International Capital Corp. estimated on Tuesday. CICC analysts led by Mao Junhua said that the corporate reforms are an additional reason for the government to allow debt-for-equity swaps, together with the need to write off existing levels of bad debt.

The government should arrange as much as 3 trillion yuan of funding for such conversions by bad-loan managers, Lai Xiaomin, chairman of China Huarong Asset Management Co., said in a proposal to the National People’s Congress this month.

— With assistance by Yuling Yang, Hui Li, and Jun Luo

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