Not a solution
Debt-equity swaps won’t solve the problem. Converting debt into equity would be required only if China’s NPL rises to an alarming level.
China regulators need to create a level playing field as foreign banks manage NPLs comparatively well. Re-labelling debt as equity won’t improve the quality of credit decisions.
The use of debt capital markets will help address the structural problem in China’s debt portfolio. Direct financing will enhance the transparency of the lending market and promote transferability of loan assets. These and other factors of system evolution are clear from ANZ’s Caged Tiger report.
The market size increased 107 per cent between 2011 and 2015 and the share of corporate bonds has risen from 16 per cent to 27 per cent. Shifting the funding model from bank loans to bonds will facilitate a proper valuation of loan assets.
Allowing foreign financial institutions to participate in the onshore bond market will also help quicken the development, by bringing in quality investors and foreign practices.
Raymond Yeung is Acting Chief Economist Greater China and Cecile Wu is Head of REI China at ANZ