De-capacity debt restructuring Fiscal revitalization of assets is the key

Recently, some media reported that the scale of the first batch of debt-to-equity swap pilots was 1 trillion yuan, targeting enterprises with potential value and temporary difficulties, mainly state-owned enterprises, "zombie enterprises" were not allowed to participate, and China Development Bank, Bank of China and other banks were selected as the first batch of debt-to-equity swap pilots
.

With the introduction of policies such as debt-to-equity swaps, the curtain of capacity reduction will be further opened
.
Ministry of Finance officials have repeatedly said that the government's debt-debt ratio is at a low level among the world's major economies, and it is still safe and feasible
to increase it appropriately.
The appropriate increase in leverage by the government will also help support the deleveraging of enterprises in the real economy and achieve a balance
of stable growth, structural adjustment and deleveraging.

In 2016, the government proposed to reduce steel production capacity
by 100 million to 150 million tons.
In order to cope with the work of reducing production capacity such as steel and coal, the central government has funded the establishment of a special fund of 100 billion yuan for the expenditure
on personnel placement in the process of capacity reduction.

Minister of Finance Lou Jiwei said during the National Two Sessions that the 100 billion yuan special fund is linked to the scale of capacity reduction, and will consider the number of employees who need to be resettled, the degree of local financial difficulties, etc.
, and implement gradient incentives
.
Lou Jiwei especially stressed that the responsibility for capacity reduction lies in enterprises and localities, and the central government only gives incentives
.

The responsibility lies mainly at the local level, but if the government can increase the leverage appropriately, how can the finance support the process of de-capacity? Zhao Quanhou, director of the Financial Research Center of the Chinese Academy of Fiscal Sciences, told the 21st Century Economic Herald reporter that on the one hand, the finance can invest in the establishment of equity investment companies to participate in the equity investment of de-capacity enterprises, and on the other hand, it is to introduce corresponding preferential tax policies to encourage mergers and reorganizations in response to the merger and reorganization
activities of a large number of enterprises in the de-production capacity.

Finance can participate in debt-to-equity swaps

As of February 2016, the balance of non-performing loans of banking financial institutions exceeded 2 trillion yuan, an increase of nearly 150 billion yuan over the beginning of the year, an increase of 35% year-on-year, and the non-performing loan ratio rose to 2.
08%.

Lou Jiwei said in early March that China's non-performing rate is rising moderately, which is a problem
that has been widely exposed in various countries after the 2008 financial crisis.
The handling of bank non-performing rates is mainly due to two forces, one is market forces, which are handled according to contract principles and market rules; On the other hand, the government has given appropriate help, and the government has appropriately added some leverage to help focused and systematic financial institutions so that they do not have serious problems
.
With a 2% NPL rate, most of the industry said that the risk is controllable, and the only thing to worry about is that if the operation of the relevant enterprises deteriorates, it can lead to a rapid increase
in the NPL rate of banks.

Zhao Quanhou told the 21st Century Economic Herald reporter that banks cannot convert debts into equity on a large scale, considering that depositors cash in and liquidity operations, it is impossible to undertake too much, and finance can also participate in it
.
For example, local equity investment funds or government guidance funds can choose some promising but illiquid enterprises to invest in them
.
The government's participation in equity investment often plays a bad role, and generally allows banks to select first, and then select
.

As soon as the debt-to-equity swap came out, it immediately aroused discussion from all walks of life
.
Some people have pointed out that the accounting beautification of enterprises and creditors through debt-to-equity swaps does not really solve the problem
.

Xu Guangjian, deputy dean of the School of Public Administration of Chinese Minmin University, told the 21st Century Business Herald reporter that the current situation of state-owned enterprise reform is completely different from that in 1998, and the reform tasks are also different
.
The non-performing rate of banks has just exceeded 2%, reaching more than 20% that year, and bank financial risks are controllable
.

Zhao Quanhou also said that debt-to-equity swaps need to be put together with enterprise restructuring and transformation, and if it is only handled by accounting techniques, it will only sink deeper and deeper
.
Debt-to-equity swaps rely more on market forces, and governments need to pay attention to systemic financial risks and regional financial risks
.

Revitalizing assets is key

The industry has been hoping to promote the introduction of preferential tax policies for enterprise mergers and reorganizations as soon as possible
.

In February this year, the central bank and other eight ministries and commissions issued Several Opinions on Financial Support for Stable Industrial Growth and Structural Enhancement, which put forward a series of specific financial policy measures to support industrial transformation and upgrading, reduce costs and increase efficiency, including promoting the merger and reorganization
of industrial enterprises.

Zhao Quanhou said that although the main responsibility for capacity reduction lies with local governments, in terms of macro-policy regulation, local governments are sometimes unable to do anything, such as preferential tax policies to promote enterprise mergers and reorganizations, encourage enterprises to carry out mergers and reorganizations, and give certain corporate income tax preferences to relevant enterprises
.
In the excess capacity industry, many debts are formed in the upstream and downstream industrial chains, and through the integration of the industrial chain, the external debt of the enterprise can be converted into domestic debt
.

Whether it is debt-to-equity swaps or enterprise mergers and reorganizations, industry insiders have pointed out that revitalizing enterprises is the key
.

Zhou Fangsheng, vice president of the China Enterprise Reform and Development Research Association, recently pointed out that more mergers and less bankruptcy are currently proposed, and this requirement was also put forward in the rescue of state-owned enterprises 20 years ago, but there are only a few successful cases and a huge price
.
There are many cases of multiple mergers, through administrative combinations, handing over loss-making enterprises and zombie enterprises to good enterprises for merger, and finally the loss-making enterprises are not solved and the good enterprises are dragged down
.
Therefore, if a zombie enterprise should be liquidated and bankrupt, it should enter bankruptcy procedures
.
If debt restructuring is only a debt restructuring, without capital restructuring, and does not stimulate the vitality of the enterprise, it will not solve the problem
.

Zhao Quanhou said that in the process of reducing production capacity, more must rely on market mechanisms, survival of the fittest, elimination of backward production capacity, the key is to invigorate enterprises and help enterprises successfully transform and upgrade
.
In this regard, all the government can do is to create a level playing field and provide a more relaxed environment
through decentralization.

Zhao Quanhou further said that the current serious overcapacity problem in China lies in the great compression
of domestic and international demand.
In the process of reducing production capacity, the government also needs to release positive signals, such as government equity funds or industry guidance funds, so as to bring together more institutions or capital to participate in relevant investments
.
We can also help overcapacity enterprises release part of their demand by appropriately increasing public investment, and encourage more enterprises to go out, open up international markets, and release part of their production capacity
.