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. Last Updated: 07/27/2016

China's $50Bln Debt-Equity Swap Stalls




BEIJING -- A $50 billion program of debt-for-equity swaps that China has trumpeted as the magic cure for its ailing state-owned business sector is making scant progress, a leading state newspaper said Wednesday.


Stiff resistance from local officials and disputes about how to value often dubious assets of state firms has meant that only a fraction of an intended 400 billion yuan ($48.31 billion) in debt swap deals have been signed, the Economic Daily said.


And in a indication of the uphill battle reformers like Premier Zhu Rongji face in pushing through an ambitious overhaul of the economy, most of the 72.5 billion yuan in swaps signed last year with 66 firms remained only pledges on paper, it said.


"The overwhelming majority of the agreements are just intentional; some did not contain plans for implementation," said the daily, China's foremost economic newspaper.


Even a pioneering swap agreement, signed in September by China Cinda Asset Management Corp. and Beijing Cement Plant and touted as a sign of quickening state sector reform, is still awaiting final approval from the government, it said.


Officials of Beijing Cement and Cinda confirmed the deal still awaits a Cabinet green light.


"The plan has been handed over to the State Council for final approval," said a Beijing Cement spokeswoman.


As in many Chinese reform plans which look promising on paper but fail to play out in practice, progress in swap deals between asset management companies, or AMCs, and state-owned firms have been stymied in part by local governments, the Economic Daily said.


"Some workers will be laid off, which could bring some pressure on local governments," the newspaper said of the obligation to restructure to be imposed on state firms which have debts converted into shares under the scheme.


China, with great fanfare, formed four AMCs last year - Cinda, Dongfang, Great Wall and Huarong - to tackle as much as $200 billion in bad debts at its big four state-owned banks.


Modeled on the Resolution Trust Corp., which cleaned up the massive U.S. savings and loan scandal in the 1980s, the plan called for AMCs to repackage the debt as equity and sell shares to investors, including foreigners.


Disputes over implementation also stalled progress.


AMCs, worried they might lose out if their shares in state firms could not be sold to investors, wanted the companies to guarantee that they would buy back some shares, but they resisted, the Economic Daily said.


Some AMCs also wanted to reappraise the assets of state firms involved to determine the actual value of the shares they would take on, it said.


However, state firms refused, fearing shares would be underpriced, the paper said.


Analysts said the slow start to the ambitious swap scheme was not a surprise, given the immature state of China's legal system, accounting practices and capital markets.


"This is actually a good thing because it indicated there has not been a headlong rush into mass action," said Zhao Xiao of the China Center for Economic Research at Peking University.


"In China, the legal system is not perfect and the capital market is not developed. In the United States, where the legal system is sound, the process took seven to 10 years," he said.


A candid admission of troubles in state media, which more commonly see only the sunny side of government policies, was a welcome sign Beijing was on top of the problem, one expert said.


"It's no surprise to see the debt-equity swaps going slowly, because a lot needs to be done on the accounting side and the legal side to make it work," said Chi Lo, senior economist at HSBC Securities in Hong Kong.


"Even more important, that a state paper is talking about this is a very strong sign that the leadership has acknowledged the problem and is committed to tackling it," he said.