CHINA: Guidance introduced to reduce enterprise leverage

Wednesday October 12 2016

The State Council of China has introduced guidance in an effort to reduce enterprises’ leverage.

The initiative to reduce enterprises’ leverage will be steadily conducted through such measures as promoting mergers and acquisitions, revitalising stock assets, optimising debt structure, carrying out debt-for-equity swap programs, and developing equity financing.

The government has called for promoting leverage reduction where the market will play a decisive role, while major players can get involved on their own will and at their own risk.

Various measures to reduce enterprises’ leverage have been presented, which include:

• forging competitive enterprises through cross-region and cross-ownership mergers and acquisitions; 
• introducing private capital to State-owned enterprises through share transfers or establishment of joint ventures;
• reinforced efforts to conduct mergers and acquisitions for enterprises in industrial overcapacity sectors, whilst eliminating zombie companies; and
• providing guidance on the restructuring of enterprises to strengthen their core business, and on transferring low-profit aspects.

Meanwhile, the State Council pledged strengthening financial support to M&A’s through measures such as granting loans, and encouraging qualified enterprises to raise funds for M&A’s through issuing preference shares, and convertible bonds.

State-owned enterprises are encouraged to draw private capital through the transfer of shares, capital increases and new share issuances.

Measures to revitalise stock assets for enterprises were also outlined. Idle assets including lands, factories and equipment will be encouraged to be reused through sales, transfers, leases, or attracting investment. In addition, the Government has outlined their intention to encourage asset-backed securitisation for enterprises’ real estate property and other creditor’s rights.

Except for situations separately determined by the state, the Government has stated that banks should entrust diversified institutions to implement debt-for-equity swaps.

The guidance states that a complete equity market should be in place to build a flexible, swift, and diversified investment and financing system. In addition, efforts should be made to promote the healthy development of the exchange market, innovate equity financing tools, and expand financing sources.

The guidance requests the elimination of Government charges at all levels to assist in reducing leverage and provide support to their auxiliary businesses.

Please click the link at the top of the page for the Government announcement to the guidance.