SASAC Wants State-owned Enterprises to Use Asset Securitisation, Debt Swaps, IPO’s to Deleverage


The State-owned Assets Supervision and Administration Commission (SASAC) is encouraging China’s central state-owned enterprises by cut debt levels and improve their capital structures via an expanded range of methods, including IPO’s, share placements, asset securitisation and debt-equity swaps.

With Xi Jinping and the State Council pointing to deleveraging of heavily indebted SOE’s as the “priority of priorities,” debt-equity swaps have already emerged as a key means of slashing the debt levels of large-scale government corporations.

China’s big five banks have already signed on for debt-equity swap agreements worth over one trillion yuan (USD$149.87 billion), with the National Reform and Development Commission previously flagging accelerated use of the instruments.

SASAC’s chief accountant Shen Ying said to Economic Information Daily that a total of 12 central SOE’s have already executed market-based debt-equity swap agreements with Chinese banks.

According to Shen in addition to debt-equity swaps, SASAC is now encouraging companies to use other methods to raise money to improve their capital structures, including IPO’s and share placements.

“SASAC supports enterprises undertaking asset securitisation operations, and effectively using their own stock of assets to raise development capital, reducing their reliance on debt to the greatest extent possible.”

China Shipbuilding Industry Corporation serves as the latest example of a central SOE making recourse to capital markets to cut its debt levels at the behest of SASAC and the central government.

The company recently announced that a total of eight investors would use either creditor’s rights or cash to acquire equity stakes in fully-invested subsidiaries Dalian Shipbuilding Industry Company and Wuchang Shipbuilding Industry Group by 21.868 billion yuan in total, subject to the approval of regulators.

The two subsidiaries had recently seen their debt-asset ratios and capital costs rise to unsustainable heights as a result of troubles on the international shipping market, prompting China Shipbuilding to turn to debt-equity swaps as well as capital increases in lieu of debt repayments as two means of shoring up their capital structures.

China Cinda Asset Management and China Orient Asset Management will reportedly use debt-equity swaps to make capital contributions of 5.34 billion yuan and 2 billion yuan respectively, while six other companies, including China State-owned Capital VC Fund, State-owned Enterprise Structural Adjustment Fund and China Life Insurance, will use cash to make a total capital contribution of 14.834 billion yuan.

Other state-owned enterprises that are making effective use of debt-equity swaps to reduce leverage levels include China Baowu Steel Group and China First Heavy Industries.

Regional SOE’s are also following suite, with the Shanxi branch of SASAC, China Construction Bank, Lu’an Group, and Jincheng Anthracite Mining Group executing market-based debt-equity cooperative framework agreements worth 20 billion yuan in the first half of the year, to expedite supply-side reforms of the local coal sector.

In May the Guangdong province government emerged as a driving force behind 20 billion in debt-equity swaps undertaken by Guangdong Rising Assets Management, 15 billion in debt-equity swaps by Guangdong Province Traffic Group and 10 billion debt-equity swaps by Guangzhou Traffic Investment Ltd.

The central government is expected to push heavily for further deleveraging of SOE’s in the near term, given the opportunity for debt reduction afforded by their strong performance this year, and a 23.1% year-on-year rise in total profits for the January-July period.