China announced a new plan for tackling the problem of its growing corporate debt pile. The proposed bad-loan relief program lets banks swap their non-performing loans for equity in the debtor companies.

The guidelines of these were released on Monday and are applicable only to high quality companies facing short-term difficulties.The new plan for reducing the corporate debt was announced by China's cabinet, State Council.

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The Chinese economy is simmering down for quite some time, reportedly making it difficult for firms to meet their debt obligations.

According to some estimates, corporate debt to GDP ratio now stands at 160 percent, up from lower than 100 percent in 2008. Its corporate debt volume is nearly $18 trillion. 

China is taking multipronged approach in dealing with corporate debt issue. These measures will include mergers and acquisitions, debt securitization and debt-to-equity swaps. 

China's central bank is also working towards creating policies for reducing debt. Under the new scheme, the banks will be induced to transfer their bad loans to asset management companies. They will likewise be encouraged to securitize their bad loans.

China stock markets cheered on the release of this plan, touching the highest point in a month.

Investors welcomed the plan for reducing the corporate debt load on the economy. Reuters reported that according to Kaiyuan Securities analyst Yang Hai, the government's decision will help channel the money to equity market, where it can boost the economy in a better way.

It is expected that the new policy may accelerate the consolidation of state-owned corporate sector, which contributes a large chunk to the whole corporate debt pile.

Tagschina, Corporate Debt, Debt Securitization