2016-03-28

Debt for Equity Swap Needs Growth that Doesn't Exist

Chinese bad debt in the late 1990s was phenomenally high as a percentage of assets, but as a percentage of rapidly growing GDP, it was a trivial matter to solve it. Not so today.

Here's Faser Howie panning the debt for equity plan.

Nikkei: Fraser Howie: China's debt swap plan isn't the right solution for bad loans
China's banking sector underwent many years of reform, hard work and accounting magic to get into shape. The 2009 stimulus undid much of that, as the banks reverted to being credit taps that the government could turn on and off. This latest swap proposal goes further to make the banks political pawns, subject to industrial state interests.

Much has been heard about supply-side management and reform of state-owned enterprises, both of which are essential to clean up the state sector, but the debt-for-equity proposal has all the makings of a short-term fix that will only make an already difficult and opaque situation worse. The debt-for-equity swaps worked well 17 years ago because China boomed in the subsequent years. The outlook now is very different, and stronger medicine is required.
In the article he also raises the issue of Cinda and Huarong, the bad debt companies that should be playing a major role in restructuring debt this time around. Instead they seem to be on the sidelines...

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