The Asia Global Payment Summit. Bali, Indonesia. 10-11 October 2019

State Council Stresses Debt-equity Swaps for Slashing Corporate Leverage

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China’s State Council has reiterated its commitment to the use of debt-equity swaps as a key tool for reducing high levels of corporate leverage, referring to state-owned enterprises specifically as the “priority of priorities.”

The latest regular meeting of China’s State Council convened by Premier Li Keqiang said that it would “further adopt market-based debt-equity swap measures to reduce corporate leverage ratios.”

According to the Council the “adoption of market-based lawful means to actively and appropriately reduce corporate leverage is a vital mission for advancing supply-side structural reforms, and possesses major significances for effectively prosecuting the war for the prevention and dissolution of key risk, and raising the efficiency and quality of growth.

“Since last year…deleveraging measures including corporate mergers and restructuring and market-based debt-equity swaps have achieved active progress, and corporate leverage has shifted from rising to falling, with results that must be fully affirmed.

“The next step is to continue to make state-owned enterprises the priority of priorities, and further push deleveraging with reference to SOE reforms, capacity reductions, cost reductions and other measures.

China launched a heavy-handed deleveraging campaign last year aimed at reducing the exorbitant pile of debt accumulated since the Great Financial Crisis, much of which is concentrated in the state-owned enterprise sector which President Xi has previously referred to as the “priority of priorities.”

In 2017 debt-equity swaps emerged as one of the key tools by which China’s central government hopes to divest SOE’s of their debt.

Since the start of 2018 Beijing has introduced measures to further encourage their usage, including allowing banks to establish private equity funds to support debt equity swap projects.

The list of priorities for Chinese SOE deleveraging as outlined by the State Council includes:

1.Improving corporate governance, unveiling mechanisms for restraining SOE assets and debt, supporting capital supplementation via share expansions and the introduction of strategic investors; advancing mixed-ownership system reforms

2. Improving corporate debt restructuring policies, advancing affiliate enterprise bankruptcy systems, exploring mechanisms for the rapid assessment and processing of bankruptcy cases. Researching and resolving the problem of bankruptcy costs for “zombie enterprises;” establishing mechanisms for governments, enterprises and banks to lawful and rationally share loses.

3. Expanding channels for the conversion of social capital into equity investment. Supporting the participation of various equity investment institutions in market-based debt-equity swaps. Formulating measures for raising and stabilising medium and long-term  low-cost equity investment funds; unveil measures for establishing private equity investment funds whose targets are debt-equity swaps. Researching and supporting debt-asset transactions on multi-tier capital markets.

4. Strengthening market-based debt-equity swap implementation entities, guiding financial institutions in the use of existing entities and state-owned investment companies in undertaking market-based debt-equity swaps, and supporting qualified banks and insurance entities in the establishment of new implementation entities, as well as encouraging asset management companies to increase their capital strength.

5. Unveiling targeted operations guidelines, standardised guidance of quality increases for market-based debt-equity swap projects; promoting the earliest possible completion of debt-equity swap amounts for which agreements have been executed, and pragmatically reducing corporate debt ratios.

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