China debt swap could leave banks in capital hole

China Huarong Energy Co

11/03/2016 03:41

(The author is a Reuters Breakingviews columnist. The opinions 
expressed are his own.) 
    By Peter Thal Larsen 
    HONG KONG, March 11 (Reuters Breakingviews) - A new rule 
will allow banks to exchange loans for equity. If used on a 
large scale it would ease pressure on ailing companies. But 
lenders would also have to recognize losses, hitting their 
capital ratios. As the banks' major shareholder, Beijing will 
end up footing the bill. 
          
    Full view will be published shortly. 
     
    CONTEXT NEWS 
    - China's central bank is preparing regulations that would 
allow commercial lenders to swap non-performing loans of 
companies for stakes in those firms, Reuters reported on March 
10 citing two people with direct knowledge of the new policy. 
    - The new rules would reduce commercial banks' 
non-performing loan (NPL) ratios. NPLs surged to a decade-high 
last year as China's economy grew at its slowest pace in a 
quarter of a century.  
    - The sources, who spoke on the condition of anonymity, said 
the release of a new document explaining the regulatory change 
was imminent. The People's Bank of China did not immediately 
respond to requests for comment. 
    - Data from the China Banking Regulatory Commission showed 
NPLs reached 1.7 percent of total loans at the end of December, 
up from 1.25 percent a year earlier. Including so-called 
"balance of interest" loans, which are overdue but not yet 
classed as non-performing, the ratio reached 5.5 percent, from 
4.4 percent at the end of 2014. 
    - China Huarong Energy, an ailing shipbuilder, on March 8 
announced a plan to exchange loans worth 14.1 billion yuan ($2.2 
billion) for shares in the company with a group of unnamed 
banks. After the swap, banks and other creditors will own 60 
percent of the company's shares. 
    - China Huarong announcement (pdf): http://bit.ly/224vsjd 
    - Reuters: Exclusive: China to ease commercial banks' bad 
debt burden via equity swaps - sources  urn:newsml:reuters.com:*:nL4N16I32F 
 
     
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    - For previous columns by the author, Reuters customers can 
click on  LARSEN/      
 
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 (On Twitter https://twitter.com/peter_tl Editing by Una Galani 
and Katrina Hamlin) 
 ((peter.thal.larsen@thomsonreuters.com; Reuters Messaging: 
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Keywords: CHINA BANKS/NPLS BREAKINGVIEWS