NDRC Flags Expanded Use of Debt-Equity Swaps for Deleveraging of State-owned Enterprises

China’s National Development and Reform Commission (NDRC) has indicated that the central government will focus on the deleveraging of state-owned enterprises in the second half of 2017, in tandem with an increased use of market-based debt-equity swaps to reduce leverage ratios.

A trio of documents published by the NDRC on its official website over the past several days reiterates the importance of deleveraging for the central government’s pursuit of supply-side reforms and reforms of the state-owned enterprise sector in 2017.

According to the NDRC the central government will “emphasise the proper performance of work for the reduction of the corporate leverage ratios of state-owned enterprises,”  via the use of “active restructuring including market-based debt-to-equity swaps,” and the acceleration of improvements to the “modern administrative structure of SOE’s.”

The NDRC said that Beijing will continue to push mixed-ownership reforms for state-owned enterprises, internal and external restraint mechanisms for SOE debt levels, as well as systemic mechanisms for controlling rise in SOE leverage ratios.

Debt-equity swaps are slated to become as “edged instruments” for reducing the leverage levels of enterprises, and play an increasingly important “comprehensive” role.

According to NDRC this involve the use of “market-based, rule-of-law methods to select high debt enterprises with [strong] development prospects for the implementation of debt-equity swaps…as well as the use of debt-equity swaps as an opportunity for advancing the reform and restructuring of corporations, and state-owned enterprises in particular, expediting further corporate equity diversification and improvements to governance structures.”

According to figures from the NDRC debt-equity swaps have thus far proved effective at reducing the aggregate debt burden of over 70 SOE’s by 1 trillion yuan (USD$149.2 billion).

President Xi Jinping declared the deleveraging of state-owned enterprises to be the “priority of priorities” at China’s recent National Financial Work Conference in mid-July, in order to protect the financial system from potential defaults by the public sector’s many ailing or inefficient companies.

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