One year after the mini-devaluation of the Chinese currency, China is getting desperate about its corporate debt situation and has given directions to make loans evergreen. According to an Aug. 8 Caixin report, the banking regulator is now telling banks to get rid of bad bank debt by swapping it for equity.
The Beijing-based financial magazine Caixin reports that the China Banking Regulatory Commission (CBRC) issued a directive to encourage government-owned so-called asset management companies (AMCs) to buy bad loans from banks. This exercise worked well during the last banking bailout at the beginning of the millennium, and China has prepared itself for another round since 2012, when local governments started to set up 27 new AMCs.
Instead of keeping a loan that a company can’t repay and writing it down, the bank would get an equity stake in the company. Because banks aren’t allowed to hold equity in companies, they would sell the equity stake to an AMC at a price the bank can afford without hurting bank equity too much. AMCs would get the money from the local or central government or the central bank.
