Banking Regulator Plans on Banning Debt Equity Swaps for Zombie SOE’s

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The latest draft version of a directive from China’s banking regulator prohibits the use of debt-equity swaps by China’s “zombie” state-owned enterprises.

The China Banking Regulatory Commission issued its latest draft of the “Commercial Bank Newly Established Debt-Equity Swap Implementation Organization Administrative Measures (Trial)” (商业银行新设债转股实施机构管理办法(试行))” on 7 August to solicit opinions on the new law from the public.

The provisions of the new draft prohibit financial institutions from conducting debt-equity swaps for certain companies, chief amongst them “zombie enterprises” that have “no hope of turning around their losses, and have already lost any prospect for survival and development.”

At the recent National Financial Work Conference held in mid-July, President Xi Jinping highlighted the deleveraging of state-owned enterprises and effective handling of moribund “zombie” SOE’s as top priorities for China’s policymakers in the near-term.

The provisions also moot a ban on debt-equity swaps for “enterprises that have lost credit because of malicious absconding from debt, enterprises whose credit and debt relationships are complex and unclear, and enterprises that do not satisfy national industrial policy, and spurred overcapacity expansions and increases in inventories.”

With respect to implementing organisations responsible for debt equity swaps, the draft provisions require that their main capital contributor and largest shareholder be commercial banks that are registered within China, and that their minimum registered capital be 10 billion yuan.

Commercial banks must hold at least 50% equity in such organisations, and the activities of such organisations must be included within their consolidated financial statements.

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