China is drafting rules to make it easier for lenders to convert bank loans into equity stakes of debtor companies, a move that would help authorities clean up the nation’s highest levels of soured credit in a decade.
China’s central bank and the country’s top economic planning agency are tasked with outlining rules that would facilitate the swap, said a person with knowledge of the matter, who asked not to be identified as the move hasn’t been announced publicly. The swaps will be done based on market principles, though details of the new regulations are not yet finalised, the person said.
The swaps would curb bad-loan levels just as they did during the country’s 1990s banking crisis, when about 30% of the nation’s 1.4 trillion yuan ($297.2 billion) of soured credit was resolved through debt-to-equity swaps, China International Capital Corp estimates. China’s deepest economic slowdown in a quarter century helped drive commercial banks’ bad loans to 1.27 trillion yuan by December, the highest level since June 2006, data from the banking regulator show.
Under China’s current banking law, debt can be swapped for equity if shares were used as collateral for the loan, though banks in this situation must unload the equity within two years. Banks seeking to swap debt for equity that was not used as collateral must obtain approval to do so from the State Council, which is the nation’s cabinet.
The People’s Bank of China and the National Development and Reform Commission didn’t immediately respond to faxed requests for comment. Reuters reported on the rules for swapping bank loans to equity yesterday.
Worsening asset quality at banks has prompted the nation’s bad-loan managers to call for the government to ease controls on debt-to-equity swaps for the industry. The government should arrange as much as 3 trillion yuan of funding for such conversions by bad-loan managers, Lai Xiaomin, chairman of China Huarong Asset Management Co, said in a proposal to the National People’s Congress this month.
Following the 1990s crisis, the swaps eventually delivered decent returns for bad-loan managers when the economy recovered, CICC analysts led by Mao Junhua wrote in a note Friday.