Hong Kong Commercial Daily:

May I ask how much space the civil affair sector gets to add leverage and what will help the companies de-lever and through what kind of means? By letting people purchase a home or by other means? Thank you.

Wang Shengbang:

Other speakers here have introduced the leverage issue. In China, the leverage ratio is one thing and leverage structure is another. Generally speaking, leverage ratios of government bodies and the civil affair sector are relatively low, below international standards or other major markets. In the corporate sector, the ratio is relatively high. How to realize the lever transfer is an important issue. After experiencing the financial crisis, many countries including the U.S. don’t seem to actually de-leverage, but rather to transfer leverage. The high leverage in the financial sector was transferred to the government, which also took leverage from the civil affair sector. Therefore, with the drop of the leverage ratio of the financial and civil affair sector, government bodies have seen a rise in the ratio.

Wang Shengbang:

From a global perspective, developed countries to some extent reduce the leverage ratio, which is related to the added leverage in new markets. The leverage transfer issue becomes a hot topic. We will continue to follow a pro-active fiscal policy to achieve fast economic growth, which is the safeguard of de-leverage. Without economic growth, there will be no de-leverage. The rising of GDP will bring a decreasing of the debt-to-GDP ratio and an increase in people’s income and trade volume. If the financial department increases leverage to push the economy to a higher stage and improve the economic efficiency of enterprises, the leverage of the corporate sector will decrease. This is a process of indirect replacement. We can also have direct replacement. In exceptional circumstances or emergency situations, for instance, there are problems arising in three major American auto companies. They receive help from the government. So far there will be no such an extreme situation in the foreseeable future.

Wang Shengbang:

How can the civil affair sector join in the de-leveraging process of the corporate sector? The mixed ownership reform we promote could now be an approach. Enterprises can issue stock and decentralize the share ownership structure to employees, individuals and management. This is one method. There is also another. The financial department could take various means to transfer some parts of the corporate sector, which could bring stable cash flow, to the civil affair sector to achieve transformation.

I think there are many different methods. Time, patience and creative ideas are what we need. Thank you.

Wenweipo:

I’d like to ask a question about debt-equity conversions. What is their current standing? What about preparations?

Sun Xuegong:

At the press conference of the closing ceremony of the NPC Session and Boao Forum, Premier Li Keqiang discussed the issue of debt-equity conversions. Li said we could use the method of market-oriented debt-equity conversion to achieve de-leverage. Based on the instructions of the State Council, the government departments concerned are researching and analyzing the issue. It is still in the research stage and has not been released. The market-oriented debt-equity conversion exists as a method for debt restructuring in a market economy, and it is optional under the framework of current policies. It is not a brand-new policy. There are some cases in China. The main point of this research is the question whether or not it is possible to give market entities more autonomy, create a better policy environment on the basis of complying with laws, rules and policies. Therefore, market entities could actively stimulate the work in accordance with laws and rules, the market and their own demands. It is a process of improving and deepening on the basis of current policies.

Through research, we have found that under the current situation market-oriented debt-equity conversion can produce positive effects especially on de-leverage and reduction of the cost of enterprises, and even on boosting the construction of the modern enterprise system, improving the corporate governance and financing structure and increasing the proportion of direct financing. It is a key point for ensuring steady growth, making structural adjustments, advancing reform and preventing risk. At present, the debt-equity conversion is an important issue. There are many opinions and suggestions. We have made some investigations and held seminars to gather opinions, some of which are very good. We will take them into consideration during research.

Sun Xuegong:

We have found that there are some misunderstandings on market-oriented debt-equity conversion. According to the research, we preliminarily think that the policy is implemented in accordance with the following basic points. First, as one of the comprehensive measures to wholly de-leverage, it must be market-oriented and legalized. There are many measures to de-leverage, and debt-equity conversion is just one of them. To wholly de-leverage we need to accomplish the market orientation on the basis of the law, and it’s the same with the debt-equity conversion. Debt-equity conversion always reminds us of the policy-related conversion in 1999. Today is a different time. Today is characterized by the object enterprise chosen by market entities. Before, the government limited the designated enterprises. However, we think the boundary line should be set or that a negative list be made. Zombie enterprises, enterprises with bad credit record and not in accordance with our policy will not be included. It's black and white. In addition, the last time financial asset management companies accepted doubtful accounts according to the book value. They had been doubtful, but not treated at a discount and the losses hadn’t been fixed. We think that this time the conversion price should be fixed through consultation with market entities on the basis of the real value. Pricing for debt and equity will be market-oriented, as will the releasing of equity.

Sun Xuegong:

Another difference involves the government accepting the consequences. No matter what the losses are, the Ministry of Finance would buy them. Under market orientation, it should not exist. However, the participants of market entities need to join in pricing conversion in accordance with the principle of market economy.

I must say that although the policy is still being researched, the basic principles are unanimous and market-oriented in accordance with laws. It is totally different from the conversion before. Moral hazard does not exist. We will take comprehensive and significant precautions. We will also insist on the regulatory standards of all involved departments. Preventive measures will be taken against risks.

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