27 Apr 2016
China: IMF on debt-equity swap for NPLs - ING
Tim Condon, Chief Economist at ING, suggests that Chinese supply-side reforms are a condition for debt-equity swaps to recognize the economic losses from NPLs in a way that cushions the growth impact.
Key Quotes
“Last week Fitch warned that the mooted CNY 1 trillion pilot program for debt-equity swaps would be bad for banks because such swaps weaken banks’ capital positions. Yesterday the IMF, in a “Technical Guidance Note” entitled “Debt-Equity Conversion and NPL Securitization in China: Some Initial Considerations” laid out the conditions for debt-equity swaps to work, i.e. help solve “the problems of excessive corporate debt and impaired bank loans.”
At end-2015 NPLs and special mention loans were CNY4.16trn (6.1% of GDP), up 41% from 2014. Financial stress from high levels of NPLs is at the heart of the hard-landing – sharp growth slowdown – scenario. NPLs represent economic losses. They will be amortized, where amortization is in the form of GDP growth points. Financial engineering and other policies can push out the start date for the repayment of the losses. The hard landing case is that the authorities have run out of easy options and will need to recognize the losses now. The soft landing case is that the authorities still have some room to maneuvre.
The IMF paper lays out conditions under which debt-equity swaps can recognize the economic losses from NPLs in a way that cushions the growth impact. Supply-side reforms are central. We’re in the soft landing camp.”
Key Quotes
“Last week Fitch warned that the mooted CNY 1 trillion pilot program for debt-equity swaps would be bad for banks because such swaps weaken banks’ capital positions. Yesterday the IMF, in a “Technical Guidance Note” entitled “Debt-Equity Conversion and NPL Securitization in China: Some Initial Considerations” laid out the conditions for debt-equity swaps to work, i.e. help solve “the problems of excessive corporate debt and impaired bank loans.”
At end-2015 NPLs and special mention loans were CNY4.16trn (6.1% of GDP), up 41% from 2014. Financial stress from high levels of NPLs is at the heart of the hard-landing – sharp growth slowdown – scenario. NPLs represent economic losses. They will be amortized, where amortization is in the form of GDP growth points. Financial engineering and other policies can push out the start date for the repayment of the losses. The hard landing case is that the authorities have run out of easy options and will need to recognize the losses now. The soft landing case is that the authorities still have some room to maneuvre.
The IMF paper lays out conditions under which debt-equity swaps can recognize the economic losses from NPLs in a way that cushions the growth impact. Supply-side reforms are central. We’re in the soft landing camp.”