Debt for equity swaps must be done by professional firms, says Huarong chief

Move will help avoid ‘moral hazards’ in plan as policymakers are yet to decide way forward

PUBLISHED : Friday, 18 March, 2016, 10:42pm
UPDATED : Friday, 18 March, 2016, 10:42pm

Professional asset management companies must handle China’s debt-to-equity swap business to avoid “moral hazards”, Lai Xiaomin, chairman of Huarong Asset Management, one of the top four state-owned bad loan banks, said on Friday in Hong Kong.

Lai, however, did not elaborate on the meaning of “moral hazard”, even as analysts expressed doubts over the debt-to-equity swap scheme being played up by the Chinese mainland authorities since March.

Chen Shujin, an analyst with DBS Vickers Securities, said: “We are concerned that, if local governments press commercial banks to swap the debt from some zombie enterprises into stakes, to avoid the bankruptcy, it would do no good to either the banks long-term earnings, nor to the supply-side reform and the whole economy.”

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Lai said, Huarong was the most appropriate firm to handle the debt-to-equity swap schemes, as it was a “third party” and has rich experience in the business.

“The debt-to-equity swap measure is a good concept...but the top authorities have not decided on how to push it forward so far,” he said.

Analysts said if commercial banks got involved in the business, the big four bad loan banks might face bigger competition.

Huarong’s annual report shows net income from the debt-to-equity disposal business reached 5.52 billion yuan (HK$6.61 billion) in 2015, up 123 per cent from 2014.

The company’s net profit increased 30.1 per cent to 16.95 billion yuan in 2015. It had raised US$2.5 billion in a Hong Kong initial public offering last year, becoming the second listed bad loan bank after China Cinda, but bigger in capitalisation. The other two are China Great Wall and China Orient.

On March 8, Huarong Energy, a heavily indebted ship maker announced that it would give creditors, including Bank of China, 60 per cent stake in return for forgiving a debt of US$2.2 billion.

Rumours swirled after the case that the central bank is considering regulations that would allow commercial lenders to swap non-performing loans of companies for stakes in those firms.

Iris Pang, an economist with Natixis said, it seemed that the Chinese government is not thinking of restructuring corporates, but rather keeping them alive even at the risk of the health of the banking sector.

The debt-to-equity swap measure is a good concept...but the top authorities have not decided on how to push it forward so far
Lai Xiaomin, chairman, Huarong Asset Management

“(If the rumour becomes true) It is very bad news for SOE reform and, more specifically for the solvency of Chinese banks. However, this is good news in the short term for sectors that are suffering from excess capacity as they will find new shareholders for their loss making business,” she said.

It seems the top decision makers are still divided on whether or not to allow commercial banks to handle the swap schemes themselves.

On Wednesday, Premier Li Keqiang said the authorities were trying to “lower the debt ratio of enterprises” through the debt-to-equity swap schemes, during the post- National People’s Congress press conference.

Shang Fulin, chairman of the China Banking Regulatory Commission (CBRC), China’s top banking watchdog said on Wednesday that the swap between commercial banks and corporates was still under discussion.

Chinese commercial banks’ non-performing loans had risen to 1.27 trillion yuan (HK$1.52 trillion) by December, the highest level since June 2006, as economic growth slowed to the weakest pace in a quarter century.