Chinese Banks to Tap Debt-for-Equity Swap

China’s big five state-owned banks plan to set up asset management companies to take advantage of the debt-for-equity swap that is part of the central government’s push to reduce corporate debt.

Caixin Media Company reported on Wednesday morning that the banks will announce plans to set up AMCs, but one institution has already shown it’s ahead of the rest, while another struck a deal with a state-owned enterprise, ATimes reported.

The big five are Bank of China, Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China and the Bank of Communications, according to the report. Each of the banks are to cough up $1.45 billion to set up subsidiaries to undertake debt-for-equity swaps.

AMCs are financial vehicles tasked with handling bad debt through various mechanisms.

The Agricultural Bank of China announced on Tuesday that it is setting up a wholly owned subsidiary called ABC Asset Management Co Ltd with a registered capital of 10 billion yuan ($1.45 billion) responsible for debt-for-equity swaps.

The debt for equity swap scheme is part of the central government’s drive to lower corporate debt that is now at $18 trillion, which is 169% of the country’s gross domestic product. It announced guidelines in October to lower the country’s corporate debt led by debt-for-equity swaps, mergers and acquisitions and other mechanisms.

In October this year, China Construction Bank signed a landmark deal with Yunnan Tin Group worth up to $1.5 billion with the aim of lowering the debt of the world’s biggest tin exporter and producer. CCB announced on November 15 that it signed a $3.1 billion debt-for-equity deal with Shandong Energy Group Co, one of the country’s largest coal producers.