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China economy

China says it will cut banks’ reserve ratios to support debt-to-equity swaps

Government will also allow firms to tap capital markets, and speed up the elimination of zombie firms

PUBLISHED : Wednesday, 08 August, 2018, 4:07pm
UPDATED : Wednesday, 08 August, 2018, 10:58pm

China will use policy tools such as targeted cuts in banks’ reserve requirement ratios to support debt-for-equity swaps this year as it seeks lower corporate debt levels, the country’s state planner said on Wednesday.

“We will use monetary policy tools, including targeted RRR cuts, to actively provide stable, low-cost medium- to long-term funding for market-based debt-for-equity swaps”, the National Development and Reform Commission said.

The government will also let firms tap capital markets, including raising funds via initial public offerings, to help their debt-to-equity swaps and deleveraging, and speed up the elimination of zombie firms, indebted or loss-making companies that need government support to continue operating, the commission said.

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The central bank last cut reserve ratios in June – the third this year – to support debt-for-equity swaps and boost credit support for small firms.

China’s economic growth slowed to 6.7 per cent in the second quarter, with the outlook clouded by an escalating trade dispute with the United States, rising corporate borrowing costs and steep declines in Chinese stocks and the yuan.

Beijing has made some progress in lowering corporate debt under a multi-year deleveraging drive, even as a crackdown on riskier lending practices has pushed up borrowing costs.

Policymakers have been pushing for debt-for-equity swaps since late 2016 to ease pressure on debt-ridden firms.

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The country’s corporate debt ratio fell 0.7 percentage points last year – its first decline since 2011 – to 159 per cent of gross domestic product, according to figures from the People’s Bank of China, suggesting some success in the deleveraging campaign.

The corporate debt mountain mostly stems from state-owned firms that have traditionally received the bulk of state stimulus funds and bank loans.