Chinese authorities kicked off a nationwide inspection of enterprises involved in debt-to-equity swaps in order to clear up irregularities within the sector.

The campaign, jointly organized by the State-owned Assets Supervision and Administration Commission (SASAC), the Ministry of Finance and banking authorities, is aimed to check the status of enterprises involved in debt-to-equity swaps, locate problems and come up with relevant solutions, SASAC announced on its website on Monday.

Regulators will look into the enterprises on their operation, management and board performance, progress of restructuring and their coordination with other relevant parties. Special investigative panels will be sent to local governments and enterprises to handle relevant problems next January.

China launched four specialized asset management companies (AMCs) in 1999, namely Huarong, Cinda, Orient and Great Wall, to take over 1.4 trillion yuan (US$169 billion) of non-performing loans from the "Big Four" State banks and the China Development Bank in 1999 and 2000.

These AMCs conducted a series of debt-to-equity swaps with around 580 State-owned enterprises (SOEs), which involved more than 400 billion yuan (US$48.3 billion) of debt.

The debts were transferred into equities the AMCs controlled in the enterprises. Normally, a new holding company would be launched after the swap based on the new equity structure.

The program was supposed to help the debt-ridden SOEs relieve the debt burden, but some enterprises did not actually finish the swaps after getting the approval, partly due to disparities of opinion on the exact method of restructuring debt settlement.

"The authorities certainly do not want to see the projects to be shelved forever," said an official with one of the four AMCs in Beijing yesterday.

The enterprises should either complete the transactions or entirely give up the swaps, said the official, who preferred to remain anonymous.

But the latter may actually halt some preferential treatment for the enterprises on debt and interest payment, so they may not be willing to do so, insiders said.

Some experts are also critical of the slow pace of restructuring in some enterprises and unsatisfactory enterprise performance in spite of the swaps.

As a matter of fact, the government reined the debt-to-equity transactions. Only a few deals have been approved since 2001.

SASAC officials said the present clear-up is to ensure a healthy development of the enterprises that practiced debt-to-equity swaps. Relevant government departments will draft a work report on the issue, with proposals for future reform, which will be submitted to the State Council.

As required, the enterprises should report the status of the holding company's progress with the asset disposal and major problems they face.

(China Daily November 24, 2004)