China framing new rules to enable debt-to-equity swaps

REUTERS/Petar Kujundzic

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.

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Bloomberg

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.