Quick take: Debt for equity bailout for zombie SOEs

Debt chasm

Quick take: Debt for equity bailout for zombie SOEs


Once again, the Chinese authorities are offering 'get out of jail free' cards to bloated, inefficient state-owned enterprises.

This time the deal under consideration is for state banks to take equity stakes in state companies facing difficulties repaying bank loans. The beauty of this arrangement is that poor-performing firms can stay in business and do not need to sell off real assets, while the banks, already dealing with rising NPLs, get to cancel out bad loans on their books.

An official at the China Development Bank cited in Caixin Weekly magazine, estimated the debt for equity swap could exceed 1 trillion yuan in the first three years. The report also indicates SOEs will be the main beneficiaries under the new scheme.

This, then, is the 'penalty' for Chinese state firms that received loans as part of the government's 4 trillion yuan stimulus package in 2009, and subsequently lost the money in wasteful projects.

While the banks and SOEs might be feeling relieved, and the government pleased with itself for apparently alleviating the problem of rising bad debt, ordinary Chinese and entrepreneurs are probably left wondering, where did all the money go?