Xinhua News Agency:

My question is for Ms. Ruan. Just now you talked about debt statistics. We know that many companies not only have bank debts, including direct financing, they also have private debt. Is private debt included in your debt statistics? Are there any statistics focusing on zombie companies, since it is a significant problem during de-leveraging?

Ruan Jianhong:

According to statistic principles, private debt should be offset by the balance. Let me explain it like this: Since a company already has some contractual relationships, capital has flows to the company’s departments. If the company conducts any internal financing, the debt should not be added into the volume; on the contrary, it should be offset by the balance.

Regarding zombie companies, if we want to count them, there must be some criteria with which you can label a company a zombie company. If there are criteria, it can be counted theoretically. However, in reality, it’s hard to count a company until it becomes a zombie company. Therefore, we will use various measures, including investigation and sampling, to estimate and calculate those zombie companies. Thank you.

CCTV:

What kinds of policies do we have to reduce companies’ leverage ratio? How can moral risks be avoided during the process? Thanks.

Sun Xuegong:

Just now, I gave you a brief introduction about the general idea of reducing leverage ratio. On structural aspect, de-leveraging mainly focuses on a company’s leverage ratio. To reduce a company’s leverage ratio, we should implement marketization and legalization, rely on main market players and reduce the leverage ratio according to a company’s own needs. We should treat both symptoms and root causes, concerning both long-term mechanisms and current problems and carry out different measures for different situations.

Basically, we should improve the building of modern enterprise systems, and promote corporate management structures, so as to set up a restriction mechanism for enterprises. Otherwise, the leverage ratio will go up and down. Therefore, we should promote enterprise reform, especially in state-owned enterprises and set up long-term mechanisms for them.

On an incremental aspect, the first goal is to control the growth of the increment. We should vigorously promote multi-level development in capital markets, especially equity markets, including exchange markets and regional equity transaction markets, in order to increase the ratio of equity financing.

For those existing debt and zombie companies, we need to solve the problem through bankruptcy liquidation and annexation and reorganization. We won’t let those zombie companies survive for a long time.

For those companies with a high leverage ratio, a series of measures can be taken, such as adjusting business structure, focusing to main business, annexation and reorganization and adjusting debt structure.

For those companies suffering a high leverage ratio and temporary difficulties, but containing good development prospects and not belonging to a zombie company, we could conduct de-leveraging through debt reorganization. After negotiating with creditors, companies could reduce their leverage ratio via making and implementing a debt reorganization plan.

Of course, moral risk will emerge during the de-leveraging process; so we should pay more attention to that and try to avoid that through the following three areas:

Firstly, the basic principle of de-leveraging is marketization, which is a practical way to avoid moral risks. The major characteristic of de-leveraging is that the government won’t bear the loss. During the process, different market players pursue different benefits and are eager to maximize their benefits. Thus, during the process, market players will restrict and monitor each other mutually.

Secondly, de-leveraging should follow the law and procedures. Both legal and administrative procedures are made to guarantee all works will be done in a fair, open and impartial manner, in order to avoid moral risks.

Thirdly, a credit system will be used to avoid moral risk. Currently, the National Development and Reform Commission (NDRC) and People's Bank of China are promoting the building of a national social credit system. There is still a lot of work need to be done on record collecting and sharing. Meanwhile, we will also set up a joint punishment mechanism. Last Friday, a press conference on joint punishment mechanism was held here by Lian Weiliang, deputy head of the NDRC. During the de-leveraging process, corporate representatives and senior officials from all relative enterprises and organizations should be included in an information sharing platform of a national credit system, through which we will avoid moral risks practically.

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