BOFIT Weekly Review 2016/43
Chinese government pushes to get debt restructurings going for troubled state-owned firms
China has been preparing a programme since last spring to ease the massive debt choking state-owned enterprises and stop the mounting level of banks’ non-performing loan portfolios. Early this month, the State Council posted guidelines for reducing corporate debt. It made clear that the arrangement only applies to high-quality firms with good chances of long-term survival. The government emphasized that the arrangement does not apply to unviable “zombie” firms, many of which operate in branches suffering from overcapacity.
The guidelines seek to avoid the problems that arose after debt-equity swaps at the end of the 1990s. They also draw on expert advice on the dangers of keeping unviable businesses on life support and the inability of banks to step in as an owner and manage troubled firms. For these reasons, the government emphasises the role of market forces in debt restructurings. In practise, debt-for-equity swaps would be performed by asset-management companies owned by banks or third parties, and the exchange of debt and shares would take place at market prices. Although the government states that it will not answer for the loans of over-indebted SOEs, it has promised extra funding to viable companies that move ahead with restructuring. The government also hopes that mergers, acquisitions, and bankruptcy actions will restore the debt-burdened corporate sector to sound basis.
While restructuring and winding down of state-owned enterprises has been slow and painful, something is happening. Earlier this month, the court approved the bankruptcy plan of state-owned Dongbei Special Steel Group after large state banks refused to swap junk bonds for shares despite pressure from the Liaoning provincial government. While the incident shows financiers that state-owned companies can also go bankrupt, it is still unclear what will be left of Dongbei after it emerges from bankruptcy and how much steel production capacity will eventually be taken off the market.