Tue, Oct 11, 2016 - Page 12 News List

China unveils plan to cut corporate debt


Chinese authorities yesterday unveiled plans to let companies give equity in themselves to banks to pay down soaring debt levels that economists warn might hamper the nation’s already slowing growth.

Companies that show “good prospects” will be allowed to negotiate swaps with lenders, Chinese National Development and Reform Commission official Lian Weiliang (連維良) told a news conference.

Lian said the system is intended to use market forces to impose discipline and warned that participants who lose money will not be bailed out.

China’s total debt is unusually high for a developing nation at the equivalent of about 250 percent of annual economic output. It surged after the 2008 global financial crisis as Beijing used infusions of credit to prop up economic growth.

That has prompted warnings that economic growth might suffer if high interest payments leave companies with no money to invest and has raised concern about the impact of potential defaults on the state-owned banking system.

The latest move comes as Chinese planners are in the midst of a marathon effort to make the state-dominated economy more productive by giving market forces a bigger role.

Beijing has promised to force state-owned enterprises to compete, shut down “zombie companies” that are kept afloat by loans and restrain growth of debt.

A handful of insolvent companies have been allowed to default on bonds.

Only “high-quality enterprises” with “temporary difficulties” and those in growth-oriented emerging industries will be allowed to negotiate debt swaps, Lian said.

He said “zombie companies” and those deemed to have no likelihood of survival would be barred.

“Market-oriented debt conversion is by no means a free lunch,” Lian said. “The relevant market players will make their own decisions, take their own risks and enjoy the benefits. The government takes no responsibility for bailing out losses.”

Lian gave no details of how the process would work, how much debt is expected to be cleared away or how much banks might lose.

Economic growth has declined over the past five years as Chinese Communist Party leaders try to steer China to a self-sustaining expansion based on domestic consumption and reduce reliance on debt-fueled investment and trade.

Growth held steady at 6.7 percent over a year earlier in the quarter that ended in June, but that was the lowest rate since the aftermath of the 2008 financial crisis.

The IMF in August called for “urgent action” on debt.

It said total debt for non-financial companies soared to the equivalent of 120 percent of GDP from 97 percent in 2011 even as economic growth slowed.

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