Beijing unveils plan to cut corporate debt with stock swaps

Workers carry wooden latter past by a Chinese government’s propaganda “China Dream” billboard on display outside a construction side in Beijing

Chinese authorities unveiled plans yesterday to let companies use debt-for-equity swaps to cut soaring debt levels that economists warn might hamper the country’s already slowing growth.
Companies that show “good prospects” will be allowed to negotiate swaps with lenders in a market-based system, the chairman of the Cabinet planning agency, the National Development and Reform Commission, said at a news conference. The official, Lian Weiliang, warned that participants who lose money will not be bailed out.
China’s total debt is unusually high for a developing country, at the equivalent of about 250 percent of annual economic output. It has risen sharply since the 2008 global crisis as Beijing used infusions of credit to prop up economic growth.
That has prompted warnings that economic growth might suffer if high interest payments mean companies have no money to invest and has raised concern about the impact of potential defaults on the state-owned banking system.
Chinese planners are in the midst of a marathon effort to make the state-dominated economy and financial system more efficient and productive by giving market forces a bigger role.
Beijing has promised repeatedly to clear away debt, shut down “zombie companies” that are kept afloat by loans and keep the growth rate of debt at manageable levels. Regulators have begun trying to enforce financial discipline by allowing a handful of insolvent companies to default on bonds, but reform advocates complain they are moving too slowly.
Only “high-quality enterprises” with “temporary difficulties” and those in growth-oriented emerging industries will be allowed to negotiate debt swaps, said Lian. He said “zombie companies” and enterprises deemed to have no likelihood of survival would be barred.
“Market-oriented debt conversion is by no means a free lunch,” said Lian. “The relevant market players will make their own decisions, take their own risks and enjoy the benefits. The government takes no responsibility for bailing out losses.” AP