Li Jiange: debt-to-equity swap cannot achieve good effects without profound SOE reform



On Mar 24th, Bo’ao Forum for Asia Annual Conference 2017 was held in Bao’ao, Hainan Province. The theme of this year's annual conference is "Globalization and Free Trade: the Asian Perspectives". Li Jiange, Chairman of the Board of Trustees of Sun Yefang Foundation and Chancellor of Guangdong Technion Israel Institute of Technology attended the session: Asset Securitization: the Good and Bad. He indicated that matched SOE reform is required in order to advance debt-to-equity reform. Without profound SOE reform, Simple debt-to-equity swap will generate bad effects and become a burden on banks.


Li looked back on the process of last round of debt-to-equity swap. In the late 1990s,  debt-to-equity swap was carried out along with SOE reform. It was placed on the agenda again during these two years. In an interview with People's Daily on May 9th, 2016, an authority stated his/her viewpoint on debt-to-equity swap: don't make debt-to-equity swap without careful consideration. It's not something that can be done easily. His/Her comment caused heated debate. Indeed, we need to have an overall review and profound reflection on the debt-to-equity swap in 1990s. 


Li Jiange said that in the round of debt-to-equity swap in 1990s, the scale of losses of SOE was over 70%. The operation of SOE was in very bad condition. Banks were encumbered by SOE and their bad loans reached up to 50%. Therefore, that round of debt-to-equity swap aimed at solving problems of SOE as well as state-owned banks. 


"To solve these problems, reform should also be conducted." Li said. During the three years of extricating SOE out of difficult situation, the total number of SOE was cut one third. A lot of SOE needed to be shut down, merged with others or shifted to manufacturing other products. That was the result of debt-to-equity swap in 1990s. Certainly there are some remaining issues. Some debt-laden enterprises were not shut down or merged because the authority did not want to cause uproar in the society. Therefore, funds were constantly injected into these enterprises after debt-to-equity swap. However, they still went bankrupt several years later.   


" This year, the central government attaches great importance to debt-to-equity swap. It stressed that market economy should be the method instead of administration or subsidy. Debt-to-equity swap cannot be applied on zombie enterprises. 'we should cut their loans and remove their breathing tubes and IV.'" Li said. Seen from this perspective, the SOE reform is not intensified enough. "Without profound SOE reform, Simple debt-to-equity swap will generate bad effects and become a burden on banks."


From China Economic Weekly




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