Date
30 March 2017
Wang Hongzhang is warning against turning bad debt into bad equity and says he will need to think about Beijing's proposal to deal with soured loans. Photo: BBC News
Wang Hongzhang is warning against turning bad debt into bad equity and says he will need to think about Beijing's proposal to deal with soured loans. Photo: BBC News

Large Chinese banks have second thoughts about debt-equity swap

Chinese banks are pushing back against a proposal to convert their soured debt to equity to deal with a potential bad-loan crisis.

Wang Hongzhang, chairman of China Construction Bank Corp., warned against turning “bad debt into bad equity”, saying he needs to think about the interests of shareholders, Bloomberg reports.

Sun Deshun, vice president of China Citic Bank Corp., said any compulsory conversion of debt into equity would have to be capped.

And Bank of China Ltd. chairman Tian Guoli said it’s “hard to evaluate” how effective debt-equity swaps will be, as so much has changed in China since the tool was used to bail out the banking system during a previous crisis in the late 1990s.

Behind the caution is a lack of clarity about how exactly the government will proceed with the conversion of up to 1.27 trillion yuan (US$195 billion) of bad debt owed to the banks mostly by the country’s lumbering state-owned enterprises and about the level of support that will be available from the state.

Bank of Communications Co., the first of China’s large banks to report 2015 earnings, said Tuesday it nearly doubled its bad-debt provisions in the fourth quarter of last year to 7.5 billion yuan.

Without backing from the government, in the form of cash injections or easier capital rules for the banks, any debt-equity swaps would simply shift the bad-loan problem from the SOEs to the banks, with potentially disastrous consequences for the stability of the nation’s lenders.

On the other hand it will be politically impossible to repeat the approach used in 1999 and again in 2004, when Chinese taxpayers effectively underwrote the bailouts, leaving the banks unscathed.

“You can’t kill three birds with one stone,” said Mu Hua, a Guangzhou-based analyst at Guangfa Securities Co., referring to the need to balance the need to fix bank and SOE bad loans while protecting the interests of Chinese taxpayers.

“Voluntary swaps won’t scale up unless the government offers enough incentive, such as lowering the risk weighting or setting up a platform for banks to dump the stakes.”

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