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 The new rules would reduce commercial banks' non-performing loan (NPL)
ratios, and free up cash for fresh lending for investment in a new
wave of infrastructure products and factory upgrades that the
government hopes will rejuvenate the world's second-largest economy.
NPLs surged to a decade-high last year as China's economy grew at
its slowest pace in a quarter of a century. Official data showed
banks held more than 4 trillion yuan ($614 billion) in NPLs and
"special mention" loans, or debts that could sour, at the year-end.
The sources, who spoke on condition of anonymity, said the release
of a new document explaining the regulatory change was imminent. The
People's Bank of China (PBOC) did not immediately respond to
requests for comment.
"Such a rule change shows banks' bad loans have risen to such a
level that this issue has to be tackled now before it's too late,"
said Wu Kan, Shanghai-based head of equity trading at investment
firm Shanshan Finance.
State banks have extended loans to government financing vehicles and
state-owned coal and steel producers, so this policy can help give
lenders time to deal with non-performing assets as China pushes
supply-side reforms, Wu added.
The quality of assets held by banks is worse than it looks, analysts
have said. To avoid stumping up capital and to protect their balance
sheets, some banks have under-reported bad loans and
under-recognized overdue debt.
The top banking regulator has warned commercial lenders to pay
special attention to risks.
Bank shares fell more than 2 percent on Thursday, with Industrial
and Commercial Bank of China down 2 percent and Bank of
Communications losing 2.7 percent.
"This was mainly due to a technical correction, but there's also
investor uncertainty over how those non-performing assets would be
valued, and disposed of eventually," said Wu at Shanshan Finance.
CABINET APPROVAL
The sources said the new regulations would get special approval from
the State Council, China's cabinet-equivalent body, thus skirting
the need to revise commercial bank law, which bars banks from
investing in non-financial institutions.
Previously, Chinese commercial banks usually dealt with NPLs by
selling them at a discount to state-designated asset management
companies which, in turn, would try to recover the debt or re-sell
at a profit to distressed debt investors.
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The sources had no further detail on how banks would value the new
equity stakes, which would represent assets on their balance sheets,
or what ratio or amount of NPLs they would be able to convert this
way.
On paper, the move would also represent a way for indebted companies
to reduce their leverage, cutting the cost of servicing debt and
making them more worthy of fresh credit.
Beijing has prioritized the closure of so-called "zombie" firms
responsible for much of China's corporate debt overhang, and has
taken aim at overcapacity in industries such as steel and coal.
Lai Xiaomin, chairman of China Huarong Asset Management Co, the
country's biggest bad debt manager, said he had no direct knowledge
of the move, but would welcome such debt-to-equity swaps.
These would help companies "improve their financial situation" and
"prevent the spread of financial risk", Lai told Reuters. Coal,
steel, real estate and machinery were among the sectors he thought
most suitable for debt-to-equity swaps.
"(In China) credit to non-financial corporates has risen in the last
five years from 120 percent of GDP to more than 160 percent in May
2015," Jose Vinals, director of monetary and capital markets at the
International Monetary Fund, said at an event in Mumbai.
"These vulnerabilities ... will need to be addressed strongly as the
economy moves towards a more market-based financial system,
including for the exchange rate."
(Reporting by Hong Kong Newsroom, Samuel Shen, Pete Sweeney and
Matthew Miller in Beijing and Suvashree Choudhury in Mumbai; Writing
by Pete Sweeney, Shu Zhang and Ryan Woo; Editing by Sam Holmes, Neil
Fullick and Ian Geoghegan)
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