China has decided to further promote measures on market-oriented debt-to-equity swaps, aiming to ease domestic enterprises’ debt burdens and strengthen their momentum of development, the State Council, the country’s cabinet, said on Wednesday.
The Chinese government is going to set up a sound pricing mechanism for debt-to-equity swaps and help financial asset investment companies overcome difficulties in fundraising, read a statement released by the council.
In addition, social capital and foreign capital are encouraged to get involved in this process.
Moreover, financial asset investment companies will be supported to set up asset management products and allow investments by insurance funds and pensions, according to the statement.
More than 900 billion yuan ($130 billion) in debt-to-equity swap projects have been realized since 2018, which lowered enterprises’ leverage ratio and improved their operating efficiency, said the statement.
“Unlike the debt-to equity swaps launched in the 1990s, this round is market-oriented and is initiated by banks and third parties, such as financial asset investment companies,” Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology, told the Global Times on Thursday.
“Next steps are facing up to the problems and overcoming the obstacles in the process of implementing the swaps,” he said.
Dong said earlier swap projects were narrowly implemented, with insufficient pricing and exit mechanisms, together with financial agencies’ difficulty in fundraising, causing unsatisfactory implementation of the swaps.
“Market-oriented debt-for-equity swaps could reduce the leverage ratio of enterprises, and greatly reduce the debt burdens of those firms with promising development potential,” Dong said.
This round of new methods announced by the State Council will overcome current problems to a great extent by establishing a transparent pricing mechanism, and involving more private and foreign sectors, he noted.
In August 2018, China’s top economic planner, the National Development and Reform Commission and other five ministries, jointly issued guidelines to establish mechanisms for preventing and controlling corporate debt risks, accelerating debt disposals by zombie companies, and other issues, according to the Xinhua News Agency.
The total number of market-oriented debt-for-equity swap projects reached 226 as of December 2018, news site ce.cn said.