China unveils plan to cut corporate debt with stock swaps

Posted October 10

— Chinese authorities unveiled plans Monday to let companies give equity in themselves to banks to pay down 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, the deputy chairman of the Cabinet planning agency, the National Development and Reform Commission, said at a news conference. The official, Lian Weiliang, stressed the system was intended to use market forces to impose discipline and 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 surged after the 2008 global financial 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 leave companies with no money to invest and has raised concern about the impact of potential defaults on the state-owned banking system.

The latest move comes as Chinese planners are in the midst of a marathon effort to make the state-dominated economy more productive by giving market forces a bigger role.

Beijing has promised to force state-owned enterprises to compete, shut down "zombie companies" that are kept afloat by loans and restrain growth of debt. A handful of insolvent companies have been allowed to default on bonds.

Only "high-quality enterprises" with "temporary difficulties" and those in growth-oriented emerging industries will be allowed to negotiate debt swaps, Lian said. He said "zombie companies" and those deemed to have no likelihood of survival would be barred.

"Market-oriented debt conversion is by no means a free lunch," Lian said. "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."

Lian gave no details of how the process will work, how much debt is expected to be cleared away or how much banks might lose.

Economic growth has declined over the past five years as Communist leaders try to steer China to a self-sustaining expansion based on domestic consumption and reduce reliance on debt-fueled investment and trade.

Growth held steady at 6.7 percent over a year earlier in the quarter that ended in June, but that was the lowest rate since the aftermath of the 2008 financial crisis.

The International Monetary Fund called in August for "urgent action" on debt. It said total debt for nonfinancial companies soared to the equivalent of 120 percent of gross domestic product from 97 percent in 2011 even as economic growth slowed.

"Vulnerabilities are still rising on a dangerous trajectory," James Daniel, the IMF director for China, said Aug. 12. "The medium-term outlook is clouded by factors including high and rising corporate debt."

Total nonperforming loans at Chinese banks, or loans on which borrowers have made no payments in 90 days, have risen above 2 trillion yuan ($300 billion), according to the banking regulator.

That is equivalent to 2.15 percent of total lending, but private sector analysts say the true level is far higher, at up to 19 percent. They say banks fail to count loans to state companies because they assume the government will bail them out.

China's debt level is comparable to developed countries and far above the developing country average of about 175 percent, according to Louis Kuijs of Oxford Economics.

Also Monday, the Cabinet called for mergers to create "a smaller number of high quality companies" and to clear away excess production capacity.

A Cabinet statement promised financial support for mergers and said state-owned companies were encouraged to raise money from private investors but gave no details.


This story has been corrected to show that Lian is a deputy chairman, not chairman, of the planning agency.


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