China’s undead army of zombie corporations will not qualify for debt-for-equity swaps, the government said, as Beijing tries to curb the risks of ballooning corporate debt.
New guidelines posted on the Chinese State Council’s Web site sought to offer some clarity to long-discussed, but hazy plans to reduce debt by letting lenders swap bad loans for shares in some debtor companies.
The policy would offer the swaps using market-determined values to help “high-quality” firms with long-term growth prospects overcome “temporary setbacks,” while barring “zombie companies” and those with poor credit ratings, the document said.
It called for mergers and acquisitions of debt-choked companies to improve competitiveness and reduce leverage.
China’s Communist authorities have repeatedly pledged to give market forces a greater role in the world’s second-largest economy, where growth is slowing and lumbering industrial firms, many of them state-owned, remain a drag.
The guidelines, posted on Monday, came as analysts have sounded alarm bells over risks of a blowout in the economy, with total debt surging 465 percent over the past decade, and corporate debt leaping to 165 percent of GDP last year, according to Bloomberg News.
If corporate borrowing growth does not slow, the ratio of sour loans could triple to 17 percent by 2020, S&P Global Ratings said in a report yesterday, adding: “We believe that the current growth rate of China’s debt is not sustainable for long.”
Economists have warned that the ballooning borrowing risks sparking a financial crisis as bad loans and bond defaults increase.
On Monday, bankruptcy proceedings for massive state-owned Dongbei Special Steel Group (東北特殊鋼集團) were approved, according to Xinhua news agency.
The 111-year-old company had defaulted on debt payments nine times in a row and now owed several billion yuan, it added.
Analysts with Nomura said they “expect more defaults and even bankruptcies further down the road,” and warned that “a rising default rate is inevitable,” driving the government to shoulder responsibility for bad company loans.
China’s total debt hit 168.48 trillion yuan (US$25.1 trillion) at the end of last year, equivalent to 249 percent of national GDP, top government think tank China Academy of Social Sciences has estimated.
Last month, the Bank for International Settlements — dubbed the central bank of central banks — said one gauge of Chinese debt had hit a record high in the first quarter of the year and warned it could face a financial crisis in the next three years.
However, at a forum in Macau yesterday, Chinese Premier Li Keqiang (李克強) said the country’s debt risks were “generally controllable,” Bloomberg News reported.
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