China’s NPL plans risks shifting burden

Author: Brian Yap | Published: 31 Mar 2016

The China Banking Regulatory Commission’s (CBRC) plans to allow commercial lenders to engage directly in debt-to-equity swaps to dispose of the country’s $614 billion of bad loans has been met with scepticism.

The CBRC revealed on March 12 that it was studying ways of revising the existing regime to allow banks to swap bad debt for equity.

Such an exchange would allow China’s commercial banks to swap the debt they hold in underperforming companies for stock holdings. Chinese commercial banks are prevented from investing in non-banking companies, although their subsidiaries can. There are also provisions in law for banks to hold shares for up to two years in case of needing

But counsel in Hong Kong are worried that commercial lenders could end up sitting on tranches of bad equity, as they wait for the indebted companies to recover instead of assisting them in the restructuring process.