China’s banks converted more than CNY1 trillion of debt into stock holdings in more than 70 state-owned enterprises (SOEs) in the government’s largest debt-to-equity swap effort to bail out the country’s most indebted borrowers. The scheme, signed between Chinese banks and companies in the steel, coal, chemicals and equipment manufacturing industries, has helped to lower the aggregate debt ratio in these industries, according to the National Development and Reform Commission (NDRC). China’s 2016 corporate debt soared to about 170% of gross domestic product (GDP), from 100% in 2008, according to the Bank of International Settlements (BIS). At double the average of other economies, the aggregate debt of China’s state-owned enterprises (SOEs) and private companies stood at USD15.7 trillion last year. The government is anxious to reduce the debt owned by the state sector to shield the country’s financial system from the risks of defaults. The debt-to-equity swaps were used previously, during the 1990s, to clean up the books of China’s state banks. What’s different this time is the swaps would proceed under market principles, giving banks and financial institutions a bigger say in choosing the indebted companies whose borrowings were to be swapped, and in fixing the financial terms of the swaps. This was done to avoid channelling funds into so-called zombie companies that were inefficient and destined for bankruptcy. Still, under draft rules, the China Banking Regulatory Commission (CBRC) aims to manage the process. For example, some banks have channelled funds they raised through wealth management products from retail investors into the debt-to-equity swap programs. It is not known whether that practice is allowed under the CBRC’s latest draft rules, the South China Morning Post reports.