By Yu Tao & Zhu Hongming, Research Institute of Finance, DRC

Research Report, No.63, 2021 (Total 6128) 2021-3-19

Abstract: Since the launch of some pilot projects in 2016, evident progress has been made in market-based debt-to-equity swaps, with a remarkable volume of 1.6 trillion yuan converted into shares. The debt-to-asset ratio relating to enterprises’ debt-to-equity swaps has been greatly lowered, and their debt risks and banks’ risks of non-performing assets have been decreased. But it needs to be noted that China’s market-based debt-to-equity swaps still face a series of problems. For instance, some fundraising projects are classified as equities, but are effectively like debts because they promise a fixed payout;; some companies’ performance remains sluggish; the proportion of private companies engaged in such swaps is relatively low; the coverage of debt-to-equity swaps is limited; the competition power of institutions implementing such swaps is weak; the number of companies withdrawing from debt-to-equity programs might increase in the future; and maturity mismatch, benefit mismatch and other institutional mechanism issues need to be solved for risk management. With regard to future work, as one of the links between indirect financing and direct financing, market-based debt-to-equity swaps need to be conducted in a normal and routine manner. Long-term low-cost funds need to be strengthened to support market performance. The institutions engaged in debt-to-equity swaps need to improve their capabilities in equity investment. The government needs to bail large-scale enterprises out of financial difficulties. The debt-to-equity swap market needs to be made more competitive. Besides, liquidity of swapped equity assets needs to be enhanced and the exit mechanism needs to be refined.

Keywords: market-based debt-to-equity swaps, debt-to-asset ratio, state-owned enterprises, financial investment