China to Allow Debt-for-Stock Swaps in State Companies

Stephen E Philion philion at
Wed Aug 4 17:07:35 PDT 1999

NY Times August 4, 1999

China to Allow Debt-for-Stock Swaps in State Companies


B EIJING -- Faced with more than $200 billion in bad debt at

moribund state-owned companies, Chinese officials said Tuesday that

they would begin a broad program of debt-for-equity swaps that

could include some foreign ownership.

China's leaders, effectively taking one more step on the long and

pothole-ridden road to privatization, have also decided that a

larger percentage of government-owned shares can be sold on the

nation's stock markets, the officials said.

Zheng Silin, vice chairman of the State Economic and Trade

Commission, the agency in charge of public-sector reform, said at a

news conference that officials were proceeding with plans to handle

China's debt through new asset management companies modeled on the

Resolution Trust Corp. in the United States.

Zheng insisted that China was keeping to the ambitious plans

announced last year by Prime Minister Zhu Rongji to eliminate the

debt of large and medium-sized state companies within three years,

or by the end of 2000.

Despite indications that Zhu's authority on policy matters has

recently been undercut, in part by the Beijing leadership's current

preoccupation with a campaign against the Falun Gong movement,

Zheng painted an optimistic picture of China's

economic-restructuring program.

"There has been gratifying momentum in China's reform and

development of state-owned enterprises," he said. "There has been a

remarkable improvement in the economic performance of these


State-owned companies earned a total of about $3 billion in the

first half of this year, Zheng said, or more than double that in

the comparable period a year earlier.

At the end of 1997, he continued, China had 16,874 large- and

medium-sized state companies, and 6,599 of them, or 39 percent,

were losing money. By the end of 1998, he said, the number of such

money-losing companies had been reduced to 5,121, either through

bankruptcy or improved management.

"In another year and a half, we're confident we will get

state-owned enterprises out of difficulty," Zheng said.

China's state companies are mired in murky accounting and hidden

debt -- so much so that it is hard for outside auditors to verify

the accuracy of a company's balance sheet, which draws question

marks around Zheng's optimistic assertions.

Yet leaders seem to finally be accepting the view of Chinese

economists: that companies need to find a way to confront their

overwhelming bad debt, caused by decades of blank-check funding by

the national and local governments.

While Communist Party leaders still routinely insist that the state

will maintain majority ownership even in companies that sell stock,

they have reluctantly agreed to one step after another that pulls

China's economy away from state control.

But debt-for-equity swaps in China are plagued by many obstacles,

above all the question of who might want to buy equity in a

money-losing company accustomed to decades of management by

officials who are politically wise but ignorant about business.

Hopeful that greater public ownership will help, Chinese officials

said Tuesday for the first time that foreign buyers would be

allowed in some cases to buy stock that is converted from debt.

"Some Chinese enterprises have been listed at home and abroad, so

in principle foreign investors are allowed to participate in this

way," said Wang Wanbin, another vice chairman of the commission.

Yet Zheng played down the likelihood that Beijing's new approval of

debt-for-equity swaps would lead to a flood of initial public

offerings. "We have to be very cautious in getting state-owned

shares listed," he said, adding that the number of state-owned

shares are much greater than the number of shares now circulating

on the market.

He announced that in addition to the existing Cinda Asset

Management Corp., which was set up in March, China had established

three new companies: the Hualong Asset Management Corp., Changcheng

Asset Management Corp. and Dong Feng Asset Management Corp.

The four companies will handle debt-for-equity swaps for each of

China's four big state-owned commercial banks: the China

Construction Bank, the Agricultural Bank of China, the China

Industrial and Commercial Bank and the Bank of China.


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