Unformatted text preview: d diverting the laid-off workers, which must be acknowledged by the local
government 0 . The selected SOE would have all or part of its default debt converted to equity
held by an AMC. The debt-equity swap policy drew immediate debates. Some experts in the field support for this
policy while others have opposite views. For example, Dr. Zhang from the World Bank, said in
an interview, "there are three goals the Chinese government is trying to accomplish by using the
debt-equity swap: 1) to help clean up banks' non-performing loans; 2) to diversify the ownership
of SOEs and thus to establish modern corporate structures; and 3) to relieve the debt burden of
SOEs in order to help them turn around in three years. It is again a government behavior, which
is somehow justified because a lot of the selected SOEs were set up from some zero-equity
30 Almanac of China's Finance and Banking 2001, p.49, 11/2001, China Publishing House for Almanac of China's
Finance and Banking projects by the government." As Professor Steinfeld from MIT discussed in his paper titled "Free
Lunch or Last Supper? - China's Debt-Equity Swaps in Context", "the debt-equity swaps are an
immediate policy responding to these problems, an effort to kill several birds with one stone....
The swap should certainly not be a free lunch for the firm, and it may not even be a last supper.
Indeed, depending on the decision of the new owner, it may be an acknowledgement that the
borrowing entity has already consumed its last meal, it no longer worthy of financial
nourishment, and instead must be dissolved. Debt-equity swap is a reward to SOEs for their prior
financial irresponsibility and another way for SETC to protect those loss-making SOEs." After the announcement of the debt-equity swap policy, a lot of SOE managers with their local
government officials rushed to Beijing to lobby SETC in anticipation of being selected.
Ironically, one of the rules of thumb in corporate finance is that equity financing is supposed to
be more expensive than debt financing because equity holder bears the higher risk with a junior
claim status to the debtor in the bankruptcy liquidation. However, Chinese SOE managers and
their local supporters still queue to participate in debt-equity conversion. According to Professor
Steinfeld, "they do so, however, because they understand something implicitly: in China, equity
financing is cheaper than debt financing. Indeed, with debt-equity swaps, equity seems to
demand no returns whatsoever." 3 ' A total of 601 SOEs were selected by the SETC (Table 6). As the end of 2000, 580 selected
SOEs completed the conversion via the AMCs, involving a total of RMB 405 billion, or 30% of Edward Steinfeld, Market visions, Market illusions: Debt-equity Conversion and the Future of Chinese State
Sector Reform, 10/2000, Massachusetts Institute of Technology 3 the total NPLs transferred from the SOBs . According to the official publication, after the
conversion, the overall d...
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- Spring '14