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Strong efforts to promote market-oriented, law-based debt-to-equity swaps

Zhang Yue
Updated: May 22,2019 11:53 PM

China will set up a proper pricing mechanism for debt-to-equity swap and develop new approaches to promote market-oriented, law-based debt-to-equity swaps. The goal is to help ease companies’ debt burdens and boost their vitality. The decision was made at the State Council’s executive meeting chaired by Premier Li Keqiang on May 22.

The Chinese government puts high importance on advancing the market-oriented, law-based debt-to-equity swap. General Secretary Xi Jinping stressed the need to deepen supply-side structural reform and implement all arrangements for debt-to-equity swaps to forestall and defuse major risks. Premier Li Keqiang pointed out that all debt-to-equity swap programs must be carried out in a market-oriented, law-based and category-by-category manner. Competent government departments should provide policy support and enhance inter-agency coordination.

It was pointed out at the meeting that the market-oriented, law-based debt-to-equity swap is an important measure to help companies with promising market potential to tackle their debt burdens, promote steady growth and prevent risks. Debt-to-equity swap programs worth over 900 billion yuan have been implemented since last year, resulting in marked improvements in the performance of the companies concerned.

“Our efforts in pursuing market-oriented, law-based debt-to-equity swap in the past few years have paid off. Work on this front has come to a crucial juncture, and will play an important role in fostering an enabling business environment and energizing market vitality,” Premier Li said. “Without success in this endeavor, China’s capital markets cannot flourish.”

The meeting decided to set up a proper pricing mechanism for the swaps, and refine the mechanism of exempting liability in cases of due diligence in State-owned enterprises and implementing agencies.

Efforts will also be made to develop new approaches to pursue swaps, and the pilot program of debt-to-preferred stocks swap should be expanded. Quality companies with a high leverage ratio as well as qualified business segments will be prioritized in the debt-to-equity swap.

“Our efforts in market-oriented, law-based debt-to-equity swaps have made some progress, yet problems that have arisen in the process need to be tackled,” Premier Li said. “Going forward, we must confront the existing problems and tackle them head-on. What’s important is to expand the scale and coverage of the swap deals and improve their quality to ensure that this endeavor achieves its desired results.”

It was decided at the meeting that multi-pronged measures will be implemented to help the financial asset investment firms involved in the swap programs replenish their capital.

Qualified trading floors will be permitted to trade the assets in the swap deals, and see that financial asset investment firms play an important role in the debt-to-equity swap process.

The meeting also urged motivating private parties to participate, improving equity structures, and providing equal protection for the rights and interests of private investors. Financial asset investment firms will be supported in launching asset management products and accepting investment from insurance and pension funds.

Publicly offered asset management products will be allowed to participate in the swap in keeping with related laws and regulations, and foreign investors are encouraged to acquire stakes in the implementing agencies.

“We need to explore ways for improved operation of the financial asset investment companies. Meanwhile, we need to further motivate private investors to participate by widening access, making the deals more attractive and protecting their rights and interests,” Premier Li said.