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China to back debt-to-equity swaps through targeted RRR cuts

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China to back debt-to-equity swaps through targeted RRR cuts

China will use policy tools such as targeted cuts in banks' reserve requirement ratio, or RRR, to support debt-for-equity swaps to lower corporate debt levels, Reuters reported Aug. 8, citing a statement from National Development and Reform Commission.

The People's Bank of China has reduced the RRR three times this year to boost credit support to companies and support debt-for-equity swaps. It last cut the RRR in June.

China will also speed up the elimination of loss-making and indebted companies, the NDRC said. It will allow companies to raise funds from the capital markets through IPOs to help their debt-to-equity swaps and deleveraging.

China has been pushing debt-for-equity swaps since 2016 to ease pressure on indebted companies. The corporate debt ratio slipped 0.7% in 2017 to 159% of GDP, the first decrease since 2011, central bank data showed, Reuters reported.

The main source of corporate debt in China are state-owned companies which have obtained the bulk of state stimulus funds and bank loans. The NDRC said it would start keeping track of state-owned firms which need supervision and will specify time-bound for reductions in their debt-to-asset ratios.