Beijing’s New Deleveraging Schedule Highlights Debt Equity Swaps, Zombie Enterprises


The Chinese central government has issued a new directive calling for the acceleration of its ongoing deleveraging campaign, with a special emphasis upon zombie enterprises.

On 8 August five of China’s leading finance and economics authorities including the National Development and Reform Commission (NDRC), the People’s Bank of China (PBOC), the Ministry of Finance (MOF) , the China Banking and Insurance Regulatory Commission (CBIRC) and the State Administration of State-owned Assets (SASAC) issued the “2018 Key Points for Work to Reduce Corporate Leverage Ratios” (2018年降低企业杠杆率工作要点).

The Notice calls for accelerated effort to reduce corporate leverage, as well as measures to better prevent and resolve major risk.

Six key points outlined by the directive for reducing corporate leverage ratios include:

i) The establishment of sound risk and control mechanisms in relation to corporate debt risk;

ii) Further advancing market-based, law-based debt-for-equity swaps;

iii) Accelerated dispose of the debt of “zombie enterprises;”

iv) Coordinated advance of other measures to reduce leverage, such as mergers and structuring;

v) Improvements to complementary policies for deleveraging;

vi) Effective performance of the organisation, coordination and monitoring of deleveraging work.

The directive also highlights three key missions that should be completed prior to the end of 2018, including:

i) Improvements to mechanisms for equity swap transactions, use of multi-tier capital markets to engage in focused equity swaps transactions, improving the liquidity of converted assets, and expansion of withdrawal channels.

ii) Strengthening protections for the rights and interests for holders of converted equity, and the research and strengthening of policy measures to protect the rights of shareholders.

iii) Improvements to the policy system for the disposable of “zombie enterprise” debt; researching and issuing comprehensive policies for effectively disposing of corporate debt in relation to “zombie enterprises” and overcapacity sectors, and specific policies for related areas such as finance. Effective implementation of tax policies that will benefit the clearance of zombie enterprises, and acceleration of the clearance of zombie enterprises by advancing debt disposal.