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
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.