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China releases guidelines for debt-for-equity swaps between banks, companies

China's government has released guidelines to help companiesreduce their bad debt loads.

The country's State Council said Oct. 10 that it will allowcompanies to grant their equity stakes to banks in exchange for debt forgiveness.It added that debt-for-equity swaps should be conducted by high-qualityenterprises, while heavily indebted companies will not qualify.

The government is also encouraging the introduction ofprivate capital to state-owned enterprises through share transfers orestablishing joint ventures. Qualified enterprises may also raise funds forM&A through issuing preference shares or convertible bonds. ConductingM&A will help eliminate heavily indebted and ineffective firms.

The debt-for-equity swap program has been met with somereluctance from Chinese banks already battling mounting nonperforming loans, The Wall Street Journal reported Oct.10. Many bankers believe such swaps should only be implemented on a limited scaleas they would need to increase the amount of capital to cover such equityholdings, which are riskier than loans.

Chinese lenders were dealing with 1.4 trillion yuan worth ofsoured loans at the end of June, according to official data. However, Wang Zhaoxing,a vice chairman at the China Banking Regulatory Commission, said that China'soverall banking sector was healthy and banks did not need to lower their bad-loanratios by swapping debt for equity.

As of Oct. 10, US$1was equivalent to 6.71 Chinese yuan.