Industry insiders say the use of debt-for-equity swaps to advance China’s state-owned enterprise reforms will accelerate in 2018, with a raft of new legislation expected before the end of the first half.
China’s recently released 2018 Government Work report mooted the “acceleration of market-based, rule-of-law based debt-for-equity swaps and corporate mergers and restructuring,” as part of efforts to “advance the prevention and dissolution of key forms of risk” in relation to the state-owned enterprise sector.
Central government regulators also said during China’s Two Sessions in March that measures to support debt-for-equity swaps are currently being further refined, and that in future there will be the “greatest possible diversification” of participating institutions.
Chen Yanqing (陈延庆), assistant president of China Cinda Asset Management, said that he expects market-based debt-for-equity swap support policies to be unveiled during the first half of 2018.
Speaking at the release of China Cinda’s 2017 performance report on 28 March, Chen said that the company had already undertaken 8 market-based debt-for-equity swap projects with companies including China Shipbuilding Industry, Xichang Mining, Huainan Mining Industry and Zhejiang Construction, involving a total sum of 10.5 billion yuan.
Huang Zhilong (黄志龙) senior researcher and chair at FinanceSN’s macro-economic centre, said to Securities Daily that policies for market-based debt-for-equity swaps require improvements in two key areas.
The first is that the implementation of market-based debt-for-equity swaps by necessity requires market-based pricing and credit assessment mechanisms, which continue to be lacking in China at present.
The second is that market-based debt-for-equity swaps require subsequent exit mechanisms, yet at present many of the enterprises that are participating in the schemes are unlisted companies.
According to Huang the Chinese government needs to foster diversified capital sources for the equity transaction market of certain enterprises, and provide the policy environment and conditions to make it possible for shareholders to withdraw from investments.
“In future we can’t exclude the possibility that securities companies or other financial institutions will actively participate in debt-for-equity swap fund-raising, and become the undertaking entities for debt-for-equity swaps,” said Huang.
“Market-based debt-for-equity swaps will potentially become the norm, and this will play a vital role in the deleveraging of central state-owned enterprises.
“[Debt-for-equity swaps] will also become a key tool for state-owned enterprise mixed-ownership reforms.”