Oct 12, 2016 07:16 PM

New Debt-for-Equity Program to Be Market-Driven, Top Official Says

(Beijing) — A new loan-relief plan for struggling state-owned enterprises unveiled Monday will allow asset management companies to decide who qualifies for the program, with the government playing only a supporting role, to avoid mistakes made during the previous state-led attempt to defuse a debt bubble in the late 1990s, a top official said.

The State Council, China's cabinet, unveiled plans that will allow state-owned enterprises (SOEs) to offer lenders equity stakes in return for having their debts written off. According to the guidelines, the program will focus on helping companies with sound long-term prospects ride out temporary difficulties so that lenders won't be stuck with unprofitable equities. It has also ruled out enterprises with a bad credit record and "zombie enterprises," which are losing money in sectors hit by overcapacity such as coal and cement, from qualifying for the swaps.

Lian Weiliang, deputy director of the National Development and Reform Commission, the country's top economic planner, also hinted that the government will be more cautious when bailing out ailing SOEs on the verge of bankruptcy. This time, market entities will be responsible for the decision-making as well as shouldering the risks, and the government will not cover the losses, he said. The debt-for-equity swap program is "by no means a free lunch," he added.

The new policies will also try to avoid the pitfalls of the previous large-scale debt clearance program in 1999, when the government set up four large asset management companies (AMCs) and transferred 1.4 trillion yuan ($208.4 billion) worth of sour loans from the country's top four state-owned banks. Experts said those AMCs found it difficult to exit the shares and had no say in the running of the enterprises.

Under the current programs, banks must set up their own asset management subsidiaries or work with third-party AMCs to handle the debt-for-equity swaps.

"A vital difference from the past is that the transfer of debt, the price of equity and the institutions that carry out the swaps will be decided by the market instead of the government," Lian said.

However, the guidelines said the government will offer "appropriate financial support" to encourage companies to join the program, including offering tax cuts to firms that "meet certain criteria" during the restructuring.

At a news conference jointly hosted by officials from various government agencies on Monday, Fan Yifei, vice president of the People's Bank of China, said the central bank will fine-tune its policies to ensure banks had adequate liquidity. Fan, however, did not detail what specific measures will be taken to assist lenders opting to forgive debt.

"This indicates the central bank will adopt a strategy of monetary easing," Ma Kunpeng, a China Merchants Securities analyst, told Caixin. "The debt-for-equity program will need large amounts of investment (including from the private sector), and sustaining liquidity (in the economy) is important."

Despite government assurances, banks that are already burdened by toxic loans will be reluctant to take on equity from poorly performing companies because it will squeeze liquidity and lead to eventual losses, an industry insider told Caixin.

By the end of June, Chinese banks were straddled with 1.4 trillion yuan in bad loans, the highest level since 2004, government data showed.

Contact reporter Wu Gang (; editor Poornima Weerasekara (

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