Across The Border | China’s debt-to-equity swap plan may struggle to take off

China’s debt-to-equity swap plan, a renewed version of the tool the government used in 1999 to spin off bad debts from state-owned banks, will come into effect in September, official media reported on Monday.

But a conflict of interests between local and central governments, as well as between creditors and companies are likely to see the plan struggle to get off the ground, analysts said.

China Securities Journal quoted authorities on Monday saying the scheme, which is being prepared by the National Development and Reform Commission (NDRC), will begin as early as mid-September, though the amount, quota and criteria for participants remain unknown.

The term “debt-to-equity swap”, meaning to swap the debt banks hold in underperforming companies for stock holdings, was raised by China’s premier Li Keqiang during the National People’s Congress in March and was hailed as a market-oriented means to reduce China’s rising leverage in the corporate sector.

However, only one debt-to-equity swap has taken shape since Li’s statement. In late March, Bank of China converted a 2.75 billion yuan (US$3.2 billion) loan to Huarong Energy, a private-owned shipping manufacturer, into a 14 per cent equity holding in the company.

Some analysts, including an “authoritative person” quoted by People’s Daily in early May, have warned that the program should be applied very selectively, to prevent it being used as a way to save so-called zombie companies.