Chinese banks bracing for debt-equity swaps revival

(From Caixin Online)

More than a decade after ending debt-for-equity swaps, China is preparing for a revival to manage 4 trillion yuan in bad debt

By staff reporter Wu Hongyuran

A yet-to-be-finalized swaps program outlined March 25 by top officials in Beijing could mirror a successful 1999-2004 project through which banks took stakes in 580 companies in exchange for canceling 405 billion yuan worth of overdue loans.

leverPremier Li Keqiang recently told the National People’s Congress that a new round of swaps could cut company leverage ratios and mitigate financial system risks. He reiterated the government’s interest in debt-for-equity swaps March 24 at the annual Boao Forum for Asia conference of government and business leaders in Hainan.

But a lot has changed since 2004.

The nation’s banks, for example, are juggling far more bad debt than they used to. Banks had an estimated 2 trillion yuan worth of non-performing loans on their books at the end of February, rising 35 percent in value from the same period 2015, Caixin learned from sources close to the China Banking Regulatory Commission. The value of all overdue loans owed by the nation’s non-financial companies alone equaled more than 160 percent of the nation’s gross domestic product as of May 2015, according to Yu Yongding, research fellow at the Chinese Academy of Social Sciences.

Since 2004, banks with no other options have been packaging bad loans and selling them at a discount to the government’s four asset management firms (AMCs), which in turn find investors willing to assume the debt. But as bad loans have surged in recent years, AMCs have been increasingly reluctant to accept bad debt. Read more


Categories: Asia Unhedged, China

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