China opens up debt-to-equity swaps, tightens rules on insurers’ investments

BEIJING (Reuters) – China will allow banks to set up private equity funds that can raise capital for firms taking part in the country’s debt-for-equity swap scheme, which was set up to ease the debt burden of state-owned enterprises.

The state planner said on its website on Friday it will allow qualified listed and non-listed companies to issue common shares, preference shares or convertible bonds to the subsidiaries of banks for financing swaps.

Separately on Friday, China’s insurance regulator said it would increase scrutiny on how insurance funds are managed and how they make their investments.

The moves come as Beijing seeks to raise the involvement of the country’s largest banks in managing the debt burden of struggling large state-owned enterprises and as it tightens the screws on regulatory risk in the financial system.

Under changes to debt-for-equity swap scheme, private equity funds can raise money via qualified banks’ wealth management products, said China’s National Development and Reform Commission.

Many firms involved in debt-for-equity swaps are in industries facing oversupply, such as steel and coal.

In November, creditors of Chongqing Iron & Steel Co voted to accept a debt-for-equity swap plan to restructure nearly 40 billion yuan ($6.04 billion) in debts.

Meanwhile, China’s insurance regulator said new rules governing insurers’ investments will come into force on April 1 at a press briefing in Beijing.

The new rules focus on governing the way funds are invested by insurers and improving risk control.

Insurance funds must only be managed by registered firms, not channel entities, said Jia Biao, vice head of the capital operation department, at a briefing in Beijing.

Some insurance companies have been using asset management firms and trust companies, China’s shadow bankers, to invest in high risk projects like property developments.

Jia also said shareholders are not to interfere with the operation of insurance funds and that overseas investments must adhere to central bank, and the foreign exchange regulator’s rules.

China has been trying to curb risk in the insurance sector, from the use of short-term funds to finance long-term assets to overly aggressive overseas acquisitions in the industry.

Large insurers, such as Anbang Insurance Group have been pulled over after acquisitive behavior.

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