China shifts economic policy as it braces for trade clash … NIKKEI June 26, 2018 at 07:53AM

China shifts economic policy as it braces for trade clash … NIKKEI


China shifts economic policy as it braces for trade clash

Banks to buoy state-owned companies with $150bn in debt-equity swaps

ISSAKU HARADA, Nikkei staff writer

BEIJING — China is putting structural reform on hold and shifting to policies intended to support growth as it prepares to shield its economy from the effects of a trade
war with the U.S.

The People’s Bank of China, the central bank, is now pressing major lenders to swap more than 1 trillion yuan ($152.9 billion) of corporate debt for equity, a move that suggests
a shift away from downsizing inefficient state-owned enterprises.

As part of this, the PBOC will cut the reserve ratio required of certain banks by 0.5 percentage points on July 5. This will free up 700 billion yuan in funds to be lent
out or otherwise put to use.

In return, banks are asked to do more to support struggling enterprises. The central bank is pushing small and midsize banks, which will see available capital rise by 200 billion yuan, to increase lending to small
and midsize businesses.

At the nation’s largest banks, reserve requirements will drop to 15.5%. These banks are to use their 500 billion yuan in fresh liquidity, plus at least as much raised from other sources, to fund debt-for-equity
swaps at major debtor companies, exchanging outstanding liabilities for stock. This will shore up borrowers’ balance sheets while allowing banks to shed some bad loans.

The State Council, China’s government, issued guidance for debt-equity swaps in October 2016. Nearly all of the more than 1 trillion yuan in planned swaps are for state-owned enterprises, including many steelmakers
and coal producers hurt by overcapacity in their industries.

But with no prospect of reselling shares in indebted companies, banks have so far conducted only around a tenth of the planned amount.

Planned swaps include a 24 billion yuan exchange for Wuhan Iron and Steel Group and a 25 billion yuan exchange for Shanxi Coking Coal Group, both involving China Construction Bank, according to the Tokyo-based
Mizuho Research Institute.

Authorities will check in quarterly to see how the swaps are progressing.

The PBOC last cut reserve requirements in April. By requiring banks to hold less in reserves, the central bank is in effect loosening monetary policy. The yuan weakened 0.4% against the dollar to reach 6.524 yuan
at the end of trading on Monday in Shanghai. This is the Chinese currency’s weakest level since the end of December.

Declines in the yuan have in the past prompted authorities to support the currency with massive market interventions. This time around, it appears that Beijing will tolerate a certain amount of depreciation, perhaps
to provide relief to the export sector.

China had gradually tightened monetary policy, raising short-term interest rates starting in 2017. At the same time, it has cracked down on the so-called shadow banking system funneling off-the-books financing
for real estate investment and infrastructure projects, fearing that excessive corporate-sector debt could set off a financial crisis in the future.

But Beijing now seems to be stepping back from reforms to stimulate the economy. Various indicators show growth slowing, and trade tensions with the U.S. have cast a shadow over the future of the currently strong
external demand for Chinese goods.

The mainland stock market is dropping alongside the yuan, and corporate bond defaults are on the rise. With investor unease growing, a researcher close to the Chinese leadership issued a report warning authorities
to be “on the alert for a financial panic.”

Whether to prioritize reform or economic stability seems to be a point of debate within the Communist Party. The powerful Politburo will meet in July to set economic policy for the latter half of the year, possibly
shedding light on which direction the country intends to go.


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