Beijing on Monday unveiled guidelines for using debt-for-equity swaps and mergers to tame soaring levels of corporate leverage and reform state firms.
It said there would be no government bailouts, no free lunch for troubled firms, and no administrative matchmaking as Beijing tried to reduce companies’ debt burden.
The guidelines were released as the Dongbei Special Steel Group, a large state-run company in Liaoning province, officially started a bankruptcy restructuring after struggling with debt defaults nine times since March, according to the Xinhua news agency.
The high corporate leverage ratio, which is estimated to be at about 250 per cent of gross domestic product, is broadly deemed as one of the biggest risks to the world’s second-biggest economy.
Officials and economists have long criticised the central government over its slow progress in deleveraging state firms.
“Zombie firms” that no longer have any hope of recovering from their losses and companies with intentions to evade their debts are among those on the blacklist in the swap plan.
But the 10,000-word guidance gave no quantitative definition for a zombie firm, many of which are believed to be state-run entities in manufacturing industries.
“The market oriented debt-to-equity swap plan is never a free lunch,” Lian Weiliang, the vice-director with planning agency the National Development and Reform Commission, said at a joint press conference with the central bank and the banking regulator yesterday.
The government will not bail out companies for any losses under the swap plans, nor will it force companies, banks or other institutions to take part, according to the guidelines.
They also required debtors and creditors to negotiate terms and prices related to deleveraging and bear the risks involved. Governments are to be responsible for improving regulations and maintaining a fair market.
The guidelines also called for acquisition and restructuring to reduce debt levels and encourage zombie companies to go bankrupt, and said that tax cuts were necessary to provide fiscal support for the lowering of corporate debt.
However, there are lingering concerns over whether Beijing has the determination to tackle underperforming firms and steer growth towards a healthy mode.
Lian warned that corporate difficulties had led to a piling up of debt risk, which could spread along the industrial chain.
Fan Yifei, a vice-governor of the People’s Bank of China, said monetary policy would remain “flexibly moderate” to create “the appropriate monetary policy” for deleveraging.
“If monetary policy is too loose, it will lead to further piling up of overall debt scales from an elevated level, which makes it hard to deleverage.
“If monetary policy is too tight, growth may drop out of the reasonable range.”