China to permit special debt-to-equity bonds in new rules

SHANGHAI, Dec 24 (Reuters) - China has drawn up new guidelines allowing institutions to issue special bonds to finance debt-to-equity swaps, the state planning agency’s official news website said., run by the National Development and Reform Commission (NDRC), said investment vehicles and asset management firms would be permitted to issue bonds at a value of no more than 70 percent of the value of the debt-to-equity contract, adding that 40 percent of the value of the bonds could be used to replenish a company’s working capital.

China has been promoting debt-to-equity swaps as a way of curbing dangerous levels of leverage among state-owned firms, with the country’s total corporate debt burden at $18 trillion, equivalent to about 169 percent of the country’s gross domestic product, according to the most recent figures from the Bank for International Settlements.

The NDRC expects the plan to help cut total company liabilities by 10-20 percent.

The first deal was agreed in September when stricken state-owned metals trader Sinosteel was allowed to swap 27 billion yuan of its debt into equity convertible bonds.

But critics have expressed concern that the policy could help local governments prop up unprofitable but politically influential “zombie” enterprises. said the guidelines would give the market a “decisive role” in the process and would aim to prevent “moral hazard”, as well as ensure that the government itself did not bear the burden of any losses. (Reporting by David Stanway; Editing by Nick Macfie)