China must take action to reduce corporate debt levels, with an aim to stabilizing them in the near- and medium-term, the country’s state planner said on Monday.
Corporate China sits on $18 trillion (£14.48 trillion) in debt, equivalent to about 169 percent of GDP, and international institutions have recently warned Beijing to stop financing weak firms, especially inefficient state-owned enterprises, which tend to crowd out the private sector.
More defaults also are needed, they say, to improve credit allocation and stop wasteful spending in the economy.
High debt levels have added to operating difficulties for some Chinese firms, increasing their debt risks and financial risks, the National Development and Reform Commission (NDRC) said in a document released during a news briefing in Beijing.
China will allow firms to develop equity financing and conduct market-oriented debt-to-equity swap process in an orderly way, the document said.
However, the swap is not a “free lunch” for troubled companies, NDRC’s vice chair Lian Weiliang said during the briefing.
The government will not be responsible for losses accrued during the swap process, he added.
“Zombie” firms are strictly forbidden from conducting debt-to-equity swaps, which will be used mainly to help high-quality companies that face temporary difficulties, Lian said.
China will also step up checks at state-owned firms in order to reduce debt levels.
However, banks cannot be forced to conduct the swaps, Lian said.
His comments were echoed by Dai Bohua, assistant minister at the Ministry of Finance, who said the government will prevent shift of risks from non-financial firms to banks under the debt-to-equity swaps.
The government will also allow firms to go bankrupt according to the law, the NDRC said.
According to a recent Reuters analysis, profits at roughly a quarter of Chinese companies were too low in the first half of this year to cover their debt servicing obligations, as earnings languish and loan burdens increase.
In an effort to reduce business costs, China will combine deleveraging with overcapacity reductions, the document said. It will also provide preferential tax treatment to help firms cut debt levels, Dai said.
China’s cabinet also issued guidance on its website on Monday for lowering corporate debt, saying China will push forward with mergers and acquisitions of firms.
(This version of the story corrects assistant finance minister’s name in 11th paragraph)
(Reporting by Kevin Yao and Yawen Chen; Editing by Kim Coghill)