China central bank researcher warns of "debt trap" for firms

[SHANGHAI] A researcher at China's central bank said the country's non-financial firms risk falling into a "debt trap" after borrowing at high levels of interest in recent years, according to an opinion piece in the official China Securities Journal on Tuesday.

China's banks should take advantage of exceptions to the country's laws to exchange company debt for preferred shares to help them deleverage, the opinion piece said.

The article was written by Yao Yudong, director of the Research Institute of Finance connected to the People's Bank of China, and Jin Hainian, the chief research officer at Noah Holding Ltd, a wealth management service provider.

"Through converting soured debt and loans into preferred shares, commercial banks will have more room to adjust the structure of those industries it supports and increase lending,"said the article.

Over the next five years it will be necessary to convert around 2.5 trillion yuan (US$402.80 billion) of debt into preferred shares, the opinion piece said, citing various estimates.

The authors suggested that a percentage of each different category of non-performing loan should be converted into preference shares. For example, 30 percent of subprime loans should be converted into preference shares.

Mr Yao and Mr Jin suggested that Chinese law should be revised to ease the process for banks to adopt debt for equity swaps. Once struggling firms have had the time and space to grow, then the bank should gradually withdraw, helping the companies to deleverage, they added.

REUTERS