China’s debt-to-equity swaps should be driven by market, not state

Beijing is encouraging the country's lenders to swap struggling borrowers' loan obligations for equity in its latest efforts to ease firms out of their debt-laden quagmires as the economy slows.

By: Reuters | Shanghai | Published:November 22, 2016 9:26 am

China’s debt-to-equity swaps should be market driven rather than government determined, Fan Gang, president of the think tank China Development Institute said, in a commentary in the ruling Communist Party’s official People’s Daily on Tuesday. Beijing is encouraging the country’s lenders to swap struggling borrowers’ loan obligations for equity in its latest efforts to ease firms out of their debt-laden quagmires as the economy slows.

“The allocation of resources in the debt-to-equity swaps should not be decided by the government, but by the parties, that is the debtor and the creditor,” said Fan, who is also a member of the central bank’s Monetary Policy Committee.

After the debt-to-equity swap, financial institutions should hold the shares for a certain period of time before selling them to diversify their assets, Fan added. “Of course, the government will be a party on many occasions and can also play a role, but it should not be involved with resource allocation,” said Fan.

The government will take a multi-pronged approach to cutting company debt, including encouraging mergers and acquisitions, bankruptcies, debt-to-equity swaps and debt securitisation, according to the guidelines issued by the State Council, China’s cabinet.