The people’s Bank of China is preparing new rules that would allow banks to exchange outstanding loans to companies on their shares.
The new rules will lead to a reduction in overdue loans in the banks, moreover, will help free up the funds needed to Finance major infrastructure projects and capital investment that will spur the growth of the second largest economy in the world.
Over the past year the volume of overdue loans rose to decade highs, as the Chinese economy grew at its slowest pace in the last 25 years. As shown by the official data, outstanding loans in domestic banks amount to more than 4 trillion yuan, more than the problem the people’s Bank of China could not ignore.
“Such a change of the rules clearly shows that the overdue loans of the banks grew to such a level that the issue must be addressed without delay until it is too late,” said the head of investment company Finance Shanshan Wu Kang.
According to him, state-owned banks have been funding state-owned coal and steel producers, so such a policy will give lenders time to deal with overdue loans.
Analysts say the banks ‘ asset quality, in fact, worse than it seems. To protect their balance sheets, some banks prefer not to report the real volume of “toxic” loans.
Immediately after the appearance of this information in the Chinese media, shares of banks on the stock markets of the country fell by more than 3%.
“This was mainly within the technical correction, however, investors are not sure how will these delinquent assets was assessed and disposed of at the end,” notes Lou.
The new rules will be reviewed by the State Council of the PRC, as its approval will allow us to circumvent the law on commercial banks, prohibiting them to invest in non-financial institutions.
Previously Chinese commercial banks, as a rule, sold overdue loans at a discount to public companies for asset management. They in turn tried to collect the debt or resell it at a profit debt investors.
At the moment it is unknown how banks will assess new packages of shares that will be received during the exchange of outstanding debt. Moreover, it is still unclear what volume of overdue loans they will be able to get rid of that way.
Theoretically this will be an opportunity for debtors to reduce the debt service costs.
In the priority of Beijing is now closing the so-called “zombie companies” that are responsible for a large proportion of corporate debt in China. In addition, Beijing is paying close attention to the issue of overcapacity in the coal and steel industries.
President of the investment company China Huarong Asset Management Corporation Lai shaoming noted that advocates are introducing payment of debt issuance, despite not knowing about innovations.
This will help companies to improve financial position and to prevent the spread of financial risk.
And the main areas where you can apply the new rules, he believes, is the coal industry, steel industry, real estate and automotive industry.
“Over the past five years in China loans non-financial corporate customers has been increased from 120% of GDP to over 160% in may 2015. It is necessary to deal decisively and quickly, as the economy moves towards the development of a market financial system, including as regards the exchange rate,” said financial adviser and head of money markets and capital markets IMF, josé Vinals.
