China speeds up debt-for-equity program

youtube video grab of China's debt bubbles

China’s biggest banks are accelerating their debt-for-equity program to offload distressed debts and to help reduce high corporate leverage.

The country’s big five lenders pledged in their annual earnings reports to continue to push the debt-for-equity program – one of the country’s solutions to reduce the corporate debt burden and contain the risk of corporate credit defaults, which is threatening the country’s financial system.

Zhao Huan, president of Agricultural Bank of China, said that his bank will make “substantial progress” in swapping debt for equity this year with more than 20 deals in the pipeline.

The bank has signed contracts with eight companies for debt-for-equity swaps and the total value of the program has reached 70 billion yuan ($10.2 billion), Zhao added. (Source: ChinaDaily)

370 billion yuan

Malaysia’s research house, MIDF Research said a debt-for-equity program is self-explanatory – a program which allows creditors to write off some debts in exchange for equity in the debtor.

The program was backed by Beijing last October in effort to reduce the indebtedness in the second largest economy.

According to the Bank of International Settlement (BIS), China’s corporate debt has reached 166% of GDP in third quarter last year and that level is indeed a concern in the mind of top lawmakers.

During the National People Congress last month, rising debt was highlighted as the top 3 issue to be tackled.

“We gather the total deals under the program so far totaling about 370 billion yuan (USD53.6 b) for the first quarter of this year – a relatively significant amount to China’s distressed corporate debt which we estimate measuring at USD285 billion (18.6% of total).

“While the program may have picked up speed, the question remains – does the fundamental problem being addressed?

“This is because a non performing loan is usually due to the entity not being profitable, and a shareholding in an unprofitable entity may not be worth its notional or even its market value,” said MIDF.

The research entity also said eventually, there will be a need to write down on the bank’s assets.

“Nonetheless, we view this news as positive to China’s economy as it signaled Beijing intention continuous intention to address its debt problem.”