China’s banking regulator, the China Banking Regulatory Commission (CBRC), has signaled that bank debts of Chinese steel and coal enterprises which are struggling to repay them may be converted into equity in the enterprises in question.
According to a document from the CBRC, asset management companies (AMCs) owned by the central and local governments would be encouraged to participate in the debt-for equity swaps scheme by investing in the so-called “backbone enterprises” in the coal and steel sectors.
The debt-for-equity swaps would reduce the debt burden on the coal and steel businesses and ease the financing difficulties experienced by the coal and steel industries. The draft regulation mentions that funds could be invested in those "backbone enterprises" which have high debt-to-asset ratios, and which also have competitive products welcomed by the market. In the future, those enterprises which undergo debt-for-equity swaps would stand out among all domestic steelmaking or coal companies and be able to embrace better development opportunities. As for the other "zombie enterprises" in the given sectors, it will be difficult for them to obtain financial support or funds and they would be forced to exit the market, which would also have the effect of reducing production capacity in China.
The criteria by which the “backbone enterprises” would be selected have not yet been specified.
Feng Fei, deputy minister at China’s Ministry of Industry and Information Technology (MIIT), stressed that production capacity reduction is not the final aim of the debt-for-equity swap, with the final aim being to promote industry upgrading and reorganization, and to improve production efficiency.
Meanwhile, according to a current rumor, China will set up two giant steel groups, which would be called Southern Steel Group and Northern Steel Group, with WISCO and Baosteel merging to become the former, and Hebei Iron and Steel Group and Shougang Group combining to form the latter. Whether this happens or not, mergers among steel enterprises will be the tendency in China in the future, and will not only reduce production capacity but will also improve production efficiency.