Beijing Accelerates Deleveraging of State Owned Enterprises with Debt-Equity Swaps

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The State-owned Assets Supervision and Administration Commission (SASAC) has said that it is accelerating the use of market-based debt-equity swaps as a key tool for the deleveraging of state-owned enterprises.

According to SASAC numerous SOE’s has have entered debt-equity swap agreements with banks, and in future the instruments will be increasingly employed to help public concerns dispose of their non-performing assets and lighten their debt loads.

Economic Information Daily reports that a total of twelve of China’s central state-owned enterprises have executed framework agreements for debt-to-equity swaps, while local SOE’s are also making extensive use of the instruments to tamp down their leverage levels.

The Shanxi State-owned Assets Council, the China Construction Bank, Lu’an Group and Jincheng Anthracite Mining Group executed a debt-equity swap cooperative framework agreement worth 20 billion yuan earlier this year, while in May the Guangdong Province Government pushed for 15 billion yuan in swaps undertaken by Guangdong Rising Assets Management and 20 billion yuan in swaps undertaken by the Guangdong Provincial Communication Group.

The authorities have also recently approved the establishment of China’s first market-based debt-to-equity swap vehicle, Jianxin Financial Asset Investment Co., Ltd. (建信金融资产投资有限公司), with registered capital of 12 billion yuan.

China’s recent National Financial Work Conference indicated that the deleveraging of SOE’s was one of the country’s chief economic priorities at present, amidst a broader deleveraging campaign launched by regulators towards the end of last year.

At a recent press conference on the first half performance of China’s central SOE’s, SASAC chief accountant Shen Ying said that SASAC would impose heavier controls upon the debt rates and debt scopes of certain highly leveraged companies.

“Since the start of the year we have invested much effort into reduction of leverage levels, promoting the optimisation of corporate capital structures, and encouraging companies to raise funds from capital markets and improve their capital structures by means of IPO’s and share allocations,” said Shen.

Shen said that SASAC had also pushed for SOE’s to reduce their dependence upon debt “to the greatest extent possible” by supporting asset-securitization and other methods for raising development funds.

Reducing the debt level of China’s SOE’s will play a critical role in overall deleveraging efforts, given that the country’s banking-dominated financial sector remains heavily beholden to public companies.

Various data sources indicate that China’s high leverage levels are concentrated primarily in non-financial state-owned enterprises.

The China Academy of Social Sciences estimates that non-financial corporate leverage was 156% at the end of 2015, with other data indicating that state-owned enterprises accounted for 70% of corporate debt.

“This indicates that China’s corporate debt suffers from structural problems,” said a central SOE executive to Economic Information Daily. “Debt is excessively concentrated in SOE’s.”

Economists point out that the excessively high debt levels of China’s SOE’s are having an adverse impact upon both the overall performance of the real economy as well as companies themselves.

When profit levels are inadequate, high debt levels can “hollow out” the productivity of individual companies as well as swathes of the real economy.

Chinese observers further note that the many “zombie” companies in the state-owned sector are a key reason behind the high debt levels of SOE’s, as they are net consumers of resources that rely on regular infusions of loans to stay afloat, and will put pressure on broader deleveraging efforts.

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