China to Allow Debt-for-Stock Swaps in State Companies
By SETH FAISON
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
"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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