Commercial banks urged to set up financial asset investment units

China will accelerate the debt-for-equity swaps of qualified companies to reduce high corporate leverage, resolve financial risks and support overall economic growth, the country's top economic regulator said.

The country will encourage commercial banks to set up financial asset investment subsidiaries to participate in the market-oriented swap program and will support them in playing a major role in the process, according to a guideline jointly issued on Monday by the National Development and Reform Commission, the People's Bank of China, the Ministry of Finance and the China Banking and Insurance Regulatory Commission.

The move came as the Chinese economy is still facing headwinds as industrial profits contracted by 2.4 percent year-on-year in the first half of this year.

Private capital will be encouraged to take part in debt-for-equity swaps. Financial institutions will also be allowed to raise funds by selling asset management products to invest in the swap programs, according to the guideline. Debt-to-equity swaps allow creditors to exchange debt for equity stakes in a company.

To resolve the problem that participating in the program may harm banks' capital adequacy, regulators will support banks to issue perpetual debt - a type of debt without a maturity date - to replenish their capital. Foreign investors will also be allowed to own stakes in the financial investment firms that take part in the debt-for-equity swaps, the guideline said.

Meanwhile, the guideline said that good-quality and competitive companies with high leverage ratios will be encouraged to participate in the program and the country will step up efforts to enhance asset pricing of swaps.

Various measures will also be unveiled to lower corporate leverage and properly handle the debt issues of loss-making "zombie companies", the guideline said, urging financial institutions to keep monitoring the risks of corporate debt.

Li Longhai, an analyst at Dongguan Securities Co Ltd, said that the measures will help banks offload distressed debt from their balance sheets and will help ease the pressure from the rising nonperforming loans.

"It will also benefit private companies and help them resolve debt risks. And it could save companies that have strong growth potential but are in temporary difficulties," Li said in a research note.

As of June 30, the contract value of the debt-for-equity swap program reached 2.4 trillion yuan ($350 billion) with about 1 trillion yuan already in place and ready for investment. The value of new contracts of debt-for-equity swaps signed in this year reached 390 billion yuan, according to the NDRC.

Zeng Gang, deputy director of the National Institution for Finance and Development, said: "The debt-for-equity swaps will improve the financing ability of companies, reduce their borrowing costs and boost their profitability as well as their business sustainability."