Banks, high-performing listed firms to gain from reform
The implementation of the upcoming debt-to-equity swap program would have a positive but limited impact on the country's A-share market, analysts said on Tuesday, following media reports that the volume of the first batch of debt-to-equity swaps will reportedly reach 1 trillion yuan ($154.41 billion).
China Development Bank, Bank of China, Industrial and Commercial Bank of China and China Merchants Bank (CMB) are likely to be the first lenders to join the debt-to-equity swap program, Beijing-based financial magazine Caixin reported on Monday.
The program is targeted at soaring nonperforming loans (NPLs) and highly leveraged firms, the report said.
"The plan will help listed firms reduce their debt ratio, lower interest payments, and cut financing costs. So they will be in a better shape, which will have a positive impact on the Chinese mainland stock market," said Xi Junyang, a professor with the Department of Finance at the Shanghai University of Finance and Economics.
Hong Kong-listed firm China Huarong Energy Co announced on March 8 that it had entered an agreement with its bank creditors to allot and issue shares up to HK$14.11 billion ($1.82 billion) to "satisfy the borrowings from the company to the creditors," according to its filing published on Hong Kong Exchanges and Clearing.
The move was in line with the company's efforts to cope with a downturn in the shipbuilding industry and ease its debt burden, the company said.
The Caixin report listed China Minsheng Bank, Bank of China and The Export-Import Bank of China as Huarong Energy's creditors, which hold 13.9 percent, 10.8 percent and 10.3 percent of stake in the company, respectively.
The mainland stock market reacted positively to the reports on swap program on Tuesday, pushing the shares of banks such as ICBC and CMB higher.
The shares of ICBC and CMB, both listed on the Shanghai Stock Exchange, were up 0.47 percent and 0.43 percent respectively. The benchmark Shanghai Composite Index on Tuesday gained about 1.45 percent to 3053.07.
However, the plan is unlikely to be carried out on a large scale and may cover only a small portion of related companies, so this positive effect on the market will be limited, Xi told the Global Times on Tuesday.
In fact, the plan is designed to help banks deal with their rising NPLs, an unnamed bank senior executive was quoted as saying in the Caixin report.
The total volume of bank NPLs reached 2 trillion yuan as of the end of February, up about 35 percent year-on-year, the report noted.
Boost to A-share market
Three parties are expected to benefit from the upcoming swap program - banks, asset management companies, and high-performing listed companies, according to media reports on Tuesday.
For instance, the balance sheets of banks will improve after the numbers of their NPLs decline, which will strengthen investors' confidence, according to news portal qq.com.
Dong Dengxin, a finance researcher with the Wuhan University of Science and Technology, agreed that there was linkage between the plan and the performance of stock market.
The market approach in the implementation of the reform could mean that individual investors will have a role as the stock market will be a "vehicle" to carry out the plan, he said.
"Effective implementation of the plan is in fact dependent on the overall performance of the stock market. If the broad market is good, then the chance of individual investors taking in these shares greatly increases, which make it easier to carry out the plan," Dong told the Global Times Tuesday.
Moreover, much of the related shares are blue-chips, with very low prices and huge volume, which will be difficult targets for speculators to "work on," noted Xi.
"With the key details of the plan yet to be released, it is difficult to envisage the plan's real impact on the market at this moment," he said.
Premier Li Keqiang said at the opening ceremony of the 2016 annual conference of the Boao Forum for Asia on March 24 that the government will push forward financial reforms, for example, to help cut enterprises' leverage ratios via debt-to-equity swap program, said the government's website.
