The selected soe would have all or part of its

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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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This document was uploaded on 03/12/2014.

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