China has officially banned banks' from carrying out debt-to-equity swaps directly, a move which has attracted some mixed responses from the market.
The State Council issued a circular on October 10 stipulating that banks can only be involved in such transactions through so-called implementing institutions. These include financial asset management companies (AMCs), insurance AMCs and state-owned investment management companies.
However, this may not be the most efficient way of carrying out such a transaction because there is an intermediary involved, said Tiecheng Yang, partner at Clifford Chance in Beijing. However, he conceded that there was some logic to this process because the investment arm of a bank or an AMC could help diffuse financial risks by creating a ring-fencing effect.
It is worth noting that only companies in some specific industries are qualified to undertake debt-to-equity swaps, such as...