Gambling on Chinese Debt

In a measure of the lengths that Beijing is considering in its quest to reduce the crushing debt load of its corporations, a developing Chinese debt-to-equity swap program may include entities outside the state-controlled banking sector. According to a report published by China's State Council on Aug. 23, the Chinese government may expand the range of entities that can participate in the nascent swap program. In earlier iterations, the swap program allowed only banks to trade outstanding loans to struggling firms for equity stakes in those firms. If enacted, the new policy will make it possible for financial institutions other than banks, and even entities such as suppliers that are not involved in finance, to participate in the program as creditors. Such a shift would likely accelerate government efforts to trim outstanding corporate debt, which has more than doubled since 2010 and now stands at more than 165 percent of gross domestic product. The idea, however, raises numerous questions, chief of which is how Beijing would maintain effective oversight of the program once participation widens beyond the state-controlled banking sector.