BEIJING — China’s State Council on Oct 10 released a guideline on the long-discussed debt-for-equity swaps, pledging the scheme will be conducted in an “orderly” fashion as the country steps up efforts to tackle high corporate debt.

Companies with “temporary difficulties” but “long-term potential” will be able to exchange their debt for stocks, according to the guideline.

Market-oriented debt-for-equity swaps will be one of the important measures to reduce corporate leverage, Lian Weiliang, deputy head of the National Development and Reform Commission, said at a news conference on the issue.

However, Lian said the scheme will not be a “free lunch” from the government and banks cannot be forced to conduct the swaps.

Poorly performing “zombie enterprises” and those with bad credit records will be forbidden from participating, according to the State Council.

The plan prevents banks from directly swapping non-performing loans, with conversions to be handled by asset management institutions and state investment firms.

Wang Zhaoxing, vice chairman of the China Banking Regulatory Commission, said at the same news conference that Chinese banks could apply to establish new qualified institutions to conduct swaps.

The central bank will maintain a prudent monetary policy with timely fine-tuning to create a favorable environment for debt reduction, said Fan Yifei, deputy governor of the People’s Bank of China.

High corporate leverage in China has become a major threat to financial stability in recent years, especially as China’s growth has faced persistent pressure.

China has made deleveraging one of the priorities to push supply-side structural reform, which was believed to be key to sustaining economic growth, together with tackling industrial overcapacity, reduction of housing inventories, lowering companies’ financing costs and shoring up weak growth areas.

Debt-for-equity swaps are generally believed to benefit both banks and struggling companies. They reduce the pressure on companies and free up bank balance sheets, releasing capital for investment.

China conducted debt-equity swaps in 1999, with 580 companies swapping around 400-billion yuan ($59.7 billion) of debt for equity, approximately a third of the total bad debt at that time.