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China may allow equity swap for easing debt situation

China may frame a law that will allow banks to covert loans into equity stake in the debtor companies. The country is said to be drafting rules in this regard in an effort to help banks clean up the highest levels of bad debts in a decade. China’s central bank and the country’s top economic planning agency are tasked with outlining rules that would facilitate the swap, according to sources. The swaps will be done based on market principles, though details of the new regulations are not yet finalized. The swaps would curb bad-loan levels just as they did during the country’s 1990s banking crisis, when about 30% of the nation’s 1.4 trillion yuan ($216 billion) of soured credit was resolved through debt-to-equity swaps. The economic slowdown in the country has led to the creation of 1.27 trillion yuan worth of bad loans by December, the highest level since June 2006. Under China’s current banking law, debt can be swapped for equity if shares were used as collateral for the loan, though banks in this situation must unload the equity within two years.

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