(Corrects assistant finance minister's name in 11th paragraph)
BEIJING Oct 10 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
Corporate China sits on $18 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
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
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
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
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
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.
(Reporting by Kevin Yao and Yawen Chen; Editing by Kim Coghill)