A Defense of Debt-for-Equity

Project Syndicate: Moving From Debt to Equity in China
For starters, China has a very high saving rate – above 45% over the last decade, much higher than in the advanced economies – which enables it to sustain higher debt levels. Moreover, China’s banking system remains the primary channel for the deployment of the household sector’s savings, meaning that those savings fund corporate investment through bank lending, rather than equity financing (which accounts for only about 5% of net investment). Indeed, the sharp acceleration in the debt-to-GDP ratio is partly attributable to the relative underdevelopment of China’s capital market.

...Giacomo Corneo of the Free University of Berlin has proposed that, in addition to taxing underused real estate, China should create a sovereign wealth fund to improve the management of public assets. Given that those assets amount to an estimated $18 trillion, a higher return on capital would boost GDP and reduce debt. China’s bank regulators have already permitted experiments in debt-equity swaps, which the International Monetary Fund says should be incorporated in a comprehensive strategy to accelerate reform of state-owned enterprises.

China has the savings to address its growing debt burden.

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