The increasingly worrying issue of Chinese corporate debt is threatening to derail the world’s second largest economy, and the financial sector is attempting to address the problem with the latest debt-for-equity arrangement, this time between China Construction Bank Corp (CCB) and machinery manufacturing company Xiamen CCRE Group.
According to inside sources, the arrangement is thought to be worth around $700 million and is the third such deal managed by the state-run banking entity, the nation’s second largest lender, since the finance ministry and Bank of China officials re-launched the initiative this month.
“We are taking necessary measures to assist the country’s manufacturing sector to offload some of their significant debt,” said the chief of CCB's debt-for-equity swap team Zhang Minghe in a BBC interview on Friday. “There is a transformative process the industry is going through regarding the consolidation of resources and we are fully in favour of the new policy,” he added.
Analysts think that Chinese corporations are saddled with at least $15 trillion of debt which is around 170 percent of the nation’s GDP, a figure which many economists fear could set the economy back decades if left unchecked.
CCB arranged a massive 25 billion yuan debt-for-equity deal for Wuhan Iron and Steel Group, a state-run company that has been struggling with rising debt, and another state firm, Yunnan Tin Group, took advantage of an 11 billion yuan agreement.
A bank spokesperson said CCB have over 60 projects of the same type in negotiation stages and will cover a variety of different industries with their assistance. The next target for their attentions is likely to be the coal sector.
CCB and other banks are expected to create new subsidiaries, which will handle these kinds of deals, allowing the bank to focus on their regular activities.
“The current Xiamen deal is a complex one because the company is directly managed by the city of
Xiamen on behalf of the state,” said the Head of Global Mergers and Acquisitions at CTI China Renaissance, William Harper. “The government have a major shareholder company already involved so they will also be a component of the negotiations to handle the 50 billion yuan in assets that the firm have to swap.”
A variety of different channels will be used by the creditors to funnel money into the company in order for them to repackage their obligations.
Many of the country’s largest banks are seeing the new policy as an important opportunity for them to branch out into the equity and investment area of the financial services sector.
