China’s plan for trillion-yuan debt-to-equity swap could backfire, IMF report warns

The IMF has joined a group of senior Chinese academics and bankers in expressing concern over Beijing’s plan to change a trillion yuan of debt into equities.

The International Monetary Fund said securitising some bank loans might “worsen the problem” by allowing “zombie” firms to continue operating.

China’s credit-fuelled and investment-driven growth over the past two decades has seen a hefty rise in corporate debt in the form of loans and bonds. Beijing backed a stock market rally last year in a bid to lower corporate borrowing but without success.

In the late 1990s, China used a debt-to-equity swap to clean up the books of state banks. The approach re-emerged early this year as another option to reduce the corporate leverage ratio.

Under the plan, the government will convert 1 trillion yuan (HK$1.19 trillion) worth of loans into equities, turning banks into shareholders, according to a report by Caixin.