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Measures to reduce enterprise leverage

Updated: Oct 10,2016 5:58 PM

The State Council decided to reduce enterprises’ leverage in its latest circular released on Oct 10, as an effort to foster a modern enterprise system, promote supply-side reform, and strengthen the economy’s resilience.

Based on a proactive fiscal policy and prudent monetary policy, the initiative to reduce enterprises’ leverage will be steadily conducted through such measures as promoting mergers and acquisitions, revitalizing stock assets, optimizing debt structure, carrying out debt-for-equity swap programs, and developing equity financing, according to the circular.

The government called for promoting leverage reduction where the market will play a decisive role, while major players can get involved on their own will and at their own risk.

The move should also be implemented in a law-based way, in order to protect the legal interests of creditors, investors and enterprise workers. In addition, it should be conducted steadily to prevent and solve all possible risks rising in the process.

Moreover, leverage reduction should be coordinated and integrated with other regulation methods, including those to lower corporate costs, cut industrial overcapacity and promote enterprise transformation and upgrading.

The circular presents a set of measures in achieving enterprises’ leverage reduction, which first encourage forging competitive enterprises through cross-region and cross-ownership mergers and acquisitions. It encourages introducing private capital to State-owned enterprises through share transfers or setting up joint ventures.

It calls for reinforced efforts to conduct mergers and acquisitions for enterprises in industrial overcapacity sectors, eliminating zombie companies and ineffective ones. In addition, it will guide the business restructuring of enterprises to strengthen their core business, and transfer sideline or low-profit ones.

Meanwhile, the State Council pledged strengthening financial support through measures such as granting mergers and acquisitions loans, and encouraging qualified enterprises to raise funds for mergers and acquisitions through issuing preference shares, and convertible bonds.

The circular also specified self-discipline measures for enterprises. It urged establishing and improving a modern enterprise system, which will monitor corporate debts and impose restraints on enterprise financial leverage.

It then called for making clear the responsibility subject for enterprises’ leverage reduction, and strengthening the evaluation mechanism for leverage reduction in State-owned enterprises.

The circular also put forward measures to revitalize stock assets for enterprises. Idle assets including lands, factories and equipment will be encouraged to be reused through sales, transfers, leases, or attracting investment. In addition, it encouraged asset-backed securitization for enterprises’ real estate property and other creditor’s rights.

According to the circular, more efforts should be in place to facilitate debt liquidation and consolidation of enterprises, speed up solution of debt default by governments and large companies.

For enterprises in temporary difficulties, support should be offered through loans, bonds and other methods allowed by policies, with measures to reduce financing costs.

The circular said debt-for-equity swap of banks should be conducted in a marketed-oriented and law-based approach, and is encouraged for high-quality enterprises.

Except for situations separately determined by the state, banks should entrust diversified institutions to implement debt-for-equity swaps, and zombie companies and unreliable ones should not be on the list.

According to the circular, a law-based bankruptcy system should be established with improved legal interpretation and policies on insolvency liquidation, to prevent illegal conduct.

Bankruptcy, restructuring, and reconciliation should be implemented for enterprises in different conditions. Enterprises with no potential for rebound should be put into bankruptcy with proper arrangement for employees. Restructuring and reconciliation are encouraged and supported for eligible enterprises.

The circular said a complete equity market should be in place to build a flexible, swift, and diversified investment and financing system. In addition, efforts should be made to promote the healthy development of the exchange market, innovate equity financing tools, and expand financing sources.

In addition, the circular urged implementing and improving supporting fiscal and tax policies to reduce leverage, and improve banks’ capacity in dealing with non-performing assets.

Meanwhile, more work should be done to establish a credit system for market players, strengthen regulation on credit lines to curb loans to enterprises with high leverage, and decide the qualification and condition of investors for leverage reduction.

The circular asked governments at all levels to eliminate improper charges to reduce the burden on enterprises in leverage reduction and provide support to their auxiliary businesses.