Chinese investors grapple with financial implications of debt-equity swaps

Replacing ‘normal’ loans with equities would entail a much higher capital charge, analysts warn

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Among the Big Four state-owned banks, China Construction Bank took the lead with a combined 200 billion yuan worth of debt-for-equity swap agreements. Photo: Nora Tam

Published: 10:21am, 31 Jan 2017Updated: 10:56pm, 31 Jan 2017

The debt relief programme for troubled companies operated by China’s Big Four banks has ballooned from zero to nearly 300 billion yuan within three months, but some suggest it looks more like a black hole, as investors with scant information grapple its financial implications.

Interviews conducted by the South China Morning Post with banking and local government officials, and analysts, provided conflicting views on its worth to the sector.

The government and private companies are enthusiastic as it allows firms to replace their sky-high debt with interest-free equities, effectively reducing their leverage.

However, the sentiment is mixed for banks because on the one hand, such a swap avoids a potentially damaging liquidation that would mean significant losses for creditors, while on the other the newly added equities would put pressure on banks’ capitalisation.

Among the Big Four state-owned banks, China Construction Bank Corp, the nation’s second-largest lender, took the lead with 200 billion yuan worth of debt-for-equity swap agreements. Industrial and Commercial Bank of China, the country’s biggest bank, has signed about 60 billion yuan worth deals so far, while the other two – Bank of China and Agricultural Bank of China – split the rest, public records show.

All the beneficiaries are state-owned enterprises, mostly in the coal, steel and metal sectors that are plagued by overcapacity.

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