Strong efforts to promote market-oriented, law-based debt-to-equity swaps

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China will set up a proper pricing mechanism for debt-to-equity swap programs and develop new approaches to pursuing swaps to promote market-oriented, law-based debt-to-equity swap.

The goal is to help ease companies' debt burdens and boost their vitality, a State Council executive meeting chaired by Premier Li Keqiang decided on Wednesday.

Premier Li pointed out that all debt-to-equity swap programs must be carried out in a market-oriented, law-based and category-by-category manner. Competent government departments should provide policy support and enhance inter-agency coordination.

It was pointed out at the meeting that a market-oriented, law-based debt-to-equity swap is an important measure to help companies with promising market potential to tackle the debt burden, promote steady growth and prevent risks. Debt-to-equity swap programs worth over 900 billion yuan (about 130 billion U.S. dollars) have been implemented since early last year, resulting in a marked improvement in the performance of the companies concerned.

"Our efforts in pursuing market-oriented, law-based debt-to-equity swap in the past few years have paid off. Work on this front has come to a crucial juncture, and will play an important role in fostering an enabling business environment and energizing market vitality," Li said. "Without success of this endeavor, China's capital markets can hardly flourish."

The meeting decided to set up a proper pricing mechanism for the swap, and refine the mechanism of exempting liability in case of due diligence in the State-owned enterprises and implementing agencies.

Efforts will also be made to develop new approaches to pursue swaps, and the pilot program of debt-to-preferred stocks swap should be expanded. Quality companies with a high leverage ratio as well as quality business segments will be prioritized in the deb-to-equity swap.

"Our efforts in the market-oriented, law-based debt-to-equity swap have paid off, yet problems that have arisen in the process need to be tackled," Li said, "Going forward, we must confront the existing problems and tackle them head-on. What's important is to expand the scale and coverage of the swap deals and improve their quality to ensure that this endeavor achieves its desired results."

It was decided at the meeting that multi-pronged measures will be implemented to help the financial asset investment firms involved in the swap programs replenish their capital.

Qualified trading floors will be permitted to trade the assets in the swap deals, and see that the financial asset investment firms play their important role in the debt-to-equity swap process.

The meeting also urged to motivate private actors to participate, improve equity structures, and provide equal protection for the rights and interests of private investors. Financial asset investment firms will be supported in launching asset management products and accepting investment from insurance and pension funds.

Publicly offered asset management products will be allowed to participate in the swap in keeping with relevant laws and regulations, and foreign investors are encouraged to acquire stake in the implementing agencies.

"We need to explore ways for improved operation of the financial asset investment companies. Meanwhile, we need to further motivate private investors to participate by widening access, making the deals more attractive and protecting their rights and interests," Li said.

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