February 7, 2018 / 11:11 AM / 9 months ago

Premier says China to extend campaign against excessive corporate debt

BEIJING/SHANGHAI (Reuters) - China will take more measures, including market-based debt-to-equity swaps, to lower corporate leverage levels, focusing on state-run companies, according to a government statement published after a cabinet meeting on Wednesday.

The government will roll out a mechanism to restrain assets and liabilities of state-owned companies, encourage the introduction of strategic investment and push forward mixed ownership reform, state media quoted the statement as saying.

The fresh commitment from the State Council after a meeting presided over by Premier Li Keqiang adds to Beijing’s deleveraging campaign to reduce financial risks rooted in a rapid build-up in debt and riskier types of financing, now in its second year.

Li said debt-for-equity swaps were already showing signs of success but said the effort must be advanced cautiously and ensure that they “truly deliver”.

“The debt-to-equity swap deserves much credit for reversing the fast rise of debt and bringing about a decline in the overall leverage ratio. It has been a market-driven, rules-based process, which has worked well so far,” Li said, according to the official Xinhua news agency.

The debt-to-asset ratio of industrial enterprises with annual business revenues at or above 20 million yuan dropped 0.6 percentage points in 2017 from the year before to 55.5 percent, it quoted government statistics as showing. For state-controlled enterprises it was down 0.9 percentage points to 60.4 percent.

“Related government departments should fulfill their responsibilities and make concerted efforts to create an enabling environment and see the debt-to-equity swap agreements through,” Li was quoted as saying.

The government pledged to widen the channel for private capital to participate in debt-for-equity swaps of state-owned enterprises, Xinhua said, adding that there would be measures to allow the establishment of private equity funds focused on debt-for-equity swaps.

Financial institutions, including banks, state capital investment companies and insurers, would be supported to conduct the swaps, the news agency said without elaborating. There would also be “targeted guidelines” to improve the quality of debt-for-equity swaps and to push deals to come into effect as soon as possible.

In addition, policies on debt restructuring and bankruptcy would be improved, with the government, firms and banks sharing losses from the bankruptcies of debt-ridden, loss-making “zombie enterprises”, Xinhua said.

Reporting by Beijing Monitoring Desk and John Ruwitch in Shanghai; Editing by Kim Coghill and Eric Meijer

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