Magazine article Business Credit

China's Debt-for-Equity Swap May Not Work after All

Magazine article Business Credit

China's Debt-for-Equity Swap May Not Work after All

Article excerpt

Chinas plans for reducing corporatesector debt by swapping debt for equity may not pan out as hoped, despite recent rules that appear to let market forces, rather than government determination, steer the effort.

Launched in October of 2016, the debtfor-equity swap (DES) plan may be suffering from a lack of investor interest outside the banking sector, according to a report from Fitch Ratings. The structure of the deals themselves still leaves banks exposed to highly leveraged corporates. State banks that participate in the plan may have their risk profiles negatively impacted.

From December to July, more than 70 businesses in sectors burdened with overcapacity signed agreements to launch the swaps, which allow banks holding debt in those enterprises to change it into equity for investors, China Daily reported. The value of such swaps has reached close to $150 billion.

More than 50% of those opting for the swaps are coal producers, followed by steel, transportation and metal companies. Most of the deals remain unfunded, however, Fitch said. China Construction Bank was the first bank to get approval to open a subsidiary to conduct market-driven debt-for-equity swaps; it has been a leader in signing such deals, Reuters reported. The bank has raised funding for only 10% of its swaps, however, which represent half of the DES total, Fitch said.

China corporate debt stands at $18 trillion, about 170% of the country's GDP, the South China Morning Post reported. The DES plan is viewed as unsustainable unless a more market-oriented solution is adopted. The China Banking Regulatory Commission issued new guidelines recently that increase the shares that financial institutions can have in the subsidiaries created to handle the swap. In theory, this increased stakeholding should give incentive to banks to choose companies for restructuring and attract private-sector investors. …

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